If I purchase a property in my own name, can I later form an LLC and transfer
ownership of the property to my LLC?
Transferring ownership of a property from your personal name to your LLC can
be accomplished by simply executing a deed from yourself to your LLC. However, if
there is a mortgage against the property, it’s important to consider the risk that
transferring ownership will trigger a “due-on-sale” clause in the mortgage. A due-on-sale
clause, which nearly all mortgages include, provide that in the event that the borrower
(mortgagor) sells or otherwise transfers ownership of the property, the lender may
accelerate the loan and declare the entire amount immediately due and payable. Most
due-on-sale clauses are written to apply to any transfer of ownership of the property,
except an LLC that is wholly owned by the borrower(s). In addition, Federal law
prohibits due-on-sale clauses from applying to transfers from a borrower to a revocable
living trust established for the benefit of the borrower).
Most industry participants agree that banking institutions rarely enforce due-on-
sale clauses as long as payments continue to be made on time. Nonetheless, there is
nothing a borrower can do to prohibit the mortgage holder from enforcing a due-on-sale
clause following a transfer of ownership, so it’s important to be aware of the risk and
prepare for the worst. To that end, it is important to consider how easily you would be
able to sell or refinance the property to pay off the mortgage in the event the lender
enforce the due-on-sale clause.