If you own your home you may be considering ways to protect your most valuable asset from legal issues. Often, people consider putting real estate into an LLC. Although this may be a wise decision for income producing investment properties, this is often a bad decision for one’s own primary residence.
Financially, there are multiple downsides to putting your primary residence into an LLC. For example, the state homestead exemption can no longer be claimed once the primary residence is transferred into an LLC. As of January 1, 2021, California overhauled its state homestead exemption, a long overdue and necessary change. Previously, individuals often could get no more than a $75,000 homestead exemption, but since the change in law the statewide minimum is now $300,000 up to a possible maximum homestead exemption of $600,000 depending on the fair market value of properties in the area. If the primary residence is transferred into an LLC, claiming the homestead exemption is no longer possible.
Additionally, the amount of tax you are liable for could also increase. Deductions to property tax and state income tax can no longer be claimed if you are not the owner of the property. Further, insurance costs could go up as well, because you are effectively a “tenant” residing in the property of the LLC, which necessitates further insurance.
Perhaps most significant are the tax issues that one could be facing if they place their primary residence in an LLC. When the property is transferred into the LLC, a change in ownership occurs, which results in you losing your capital gains deduction.
Financing could also be an issue. Most loans have a “due on sale” clause, meaning that a transfer in ownership makes the entire remaining loan balance due in full. Transferring ownership into an LLC is enough to trigger this clause, making any loans with such a clause due in full at the time of transfer.
For these reasons, LLCs are better suited for real estate you do not plan to live in. Although LLCs can provide some liability protection, the financial cost of transferring your primary residence into one often outweighs the benefit.
