Dear Attorney Tully: I own rental property. My friends at the senior center are telling me to put my rental property into an LLC so that I’m protected from liability if I’m sued for any reason.
ANSWER: If you own rental property, you’ve probably heard that transferring it to a limited liability company (LLC) is a good way to limit your liability.
If an accident were to occur on the property and you were sued, having rental property owned by a properly run LLC would ensure that the plaintiff could reach only those assets owned by the LLC, and not the rest of your assets. Given this, the decision to transfer property to an LLC seems like a no-brainer, right? Why wouldn’t you want to limit your liability?
What many people fail to consider when doing this kind of planning is whether there is a mortgage on the property and how the mortgage will be affected by the transfer of title. If the property is mortgaged, it’s extremely important that you review the loan documents prior to making any transfers. Most mortgages include a “due on sale” or “acceleration” clause that looks something like this:
“If all or any part of the property is transferred without the lender’s prior written consent, the lender may require all sums secured hereby immediately due and payable.”
This means that if the property is transferred without the lender’s prior written consent, the lender has the option of accelerating the mortgage so it becomes due the moment it is transferred into the LLC. If the borrower cannot pay off the entire mortgage at that time, the lender may foreclose on the property.
If the mortgage contains language like this, we strongly recommend you write the lender prior to making any transfers, to request its written consent in a document signed by the lender. Without consent in a signed writing, you run the risk of having your mortgage accelerated.