5 Steps To Creating An LLC in New Jersey And Moving A Property Into The LLC
When creating an LLC and moving a property via Quitclaim deed in New Jersey into an LLC, no attorney is required. However, a notary will be required. Just because an attorney is not required, does not mean you shouldn’t hire one, or that the attorney will not get the work done much faster and easier than you could. If you really want to Do It Yourself, the below is a list of steps with links to places to create “Free” forms.
The 5 basic steps are:
1. Name the LLC
2. Form the LLC with the State of New Jersey
3. Get a Federal Employment Identification number (FEIN / EIN)
4. Fill out the forms for a Quitclaim Deed for the property assigning the Property to the LLC
5. Register the Deed with the County and other required forms. (Coversheet, Quitclaim Deed & Git/Rep)
Step 1- Name your LLC
Check to make sure it is not already in use and you cannot use restricted words such as FBI, LLC or Law Office, LLC.
Step 2 – Form the LLC using New Jersey’s Online Portal
Filing out the information online, New Jersey’s online portal will help you create the articles of incorporation if you have not already while registering the LLC.
What you will need:
Business Name & Type
Registered Agent information (including Email Address to receive Registered Agent notifications) – The registered agent is the person that is designated to accept service for the LLC. This could be a person or a business.
Any provisions you would like to include
A list of signors that are authorized to conduct business on the LLC’s behalf.
You should also create an Operating agreement as to how the LLC will function.
Step 3 – Get a Federal Employment Identification number – (Normally called an EIN or FEIN)
NJ has its own registration for a NJ Tax ID. If you are going to have employees, you will also have to register with the state for that. And make sure to remember your yearly filings for the LLC. And, if you need business permits you should get those also if you are going to do anything other than hold property with the LLC.
Step 4 – Fill out the forms for a Quitclaim Deed for the property
County Cover Sheet – These vary by county and change every time the register for the county changes. See Sample: http://www.essexregister.com/wp-content/uploads/2020/02/Cover-Sheet-for-All-Documents.pdf
Quitclaim Deed – https://legaltemplates.net/form/quitclaim-deed/new-jersey-nj
Step 5 – File the Forms with the County the Property is Located
If you want my law office to do all of this for you we charge $1750 which includes the filing fees for the LLC and Registering the Deed. You can fill out the below form and we will begin work on the LLC and Quitclaim Deed.
The Bottom Line – Why an LLC for Property
Transferring the title on a rental property from your name to an LLC can have unintended consequences. This is why we recommend you consult with an attorney or a financial adviser before proceeding to make sure the pros out way the cons.
What is a Quitclaim Deed?
Quitclaim deeds are legal documents used to convey a person’s or business’s interest in a property with no warranty as to the quality of the deed. There are three types of deeds used to transfer an interest in real property: General, Special Warranty, and Quitclaim deeds.
They all perform the same basic purpose, but the quitclaim deed, in particular, has no built-in protections for the person receiving the interest in the property.
Normally when a Seller transfers a property the Buyer receiving the property is invested with the legal interests attached to the property.
Cons to Quitclaim Deeds when moving a Property from your Name to an LLC
You do not get a Homestead Exemption in an LLC
Property tax incentives such as the homestead exemption, shield a portion of your personal residence from property taxes and in the event of bankruptcy, you are also able to claim a Homestead Exemption in bankruptcy.
These exemptions are only available to people on their personal residence.
Residential Vs. Commercial Loans
Fannie May and Freddie Mac will only buy or guarantee loans that are issued to a person, not a business entity. This means residential lenders, who offer the most attractive rates won’t refinance a property that is held by an LLC. This also means more money will have to be put down on a property in general.
If you want to open up these options you can always quitclaim the property from the LLC to your personal name if you have already moved the property into an LLC.
Capital Gains Taxes
If you sell your investment, you could get hit with state and federal capital gains taxes when you go to sell your rental property. There are ways around this with a 1031 exchange, and there are tons of businesses that are lining up to help people when this happens.
Due on Sale Clause
If you take out a loan for a property, there is a good chance there is a Due on Sale Clause in the loan paperwork. The due on sale clause allows your lender the right to trigger the “Acceleration Clause”. A trigger event is any event that allows or causes another event to happen. In the Due on Sales Clause, the Trigger Event would be a transfer of any portion of an ownership interest to an entity other than that which is on the deed and the note. So if you transfer the property from your name to an LLC this is considered a Trigger event.
An acceleration clause forces accelerated repayment of the outstanding balance of the mortgage. Which means the entire mortgage becomes due. This also happens when you miss payments to your lender and the lender calls the entire note due so they can begin a foreclosure proceeding. Transferring title from yourself by Quitclaim deed into an LLC is considered a transfer of ownership interest by banks and can cause the loan to be accelerated.
Does a Bank always Trigger an Acceleration Clause?
No. But, you have been warned that it can happen.
So you think, “The bank will never find out and if they do they rather be paid.”
As long as the payments are made, the bank has no reason to look. But that doesn’t mean they won’t. Imagine your property has appreciated $200,000 on a $200,000 loan making it worth $400.000, and the bank is facing a cash crunch because the Fed says they need to keep more cash on hand.
Calling your note due would be a no brainer for the bank to try to get more liquidity.
You Can Ask Permission From Your Bank to Transfer into an LLC or Refinance into a Commercial Loan
Banks will sometimes give permission to transfer a property into an LLC. If you become the holder of multiple properties banks at times will loan against the entire package of properties.
As you get more assets, this is the time to make sure you protect them by talking to an attorney and financial planner.
This month I have talked to several people that are losing millions of dollars because of Covid, and because they approached an attorney too late, are facing issues they could have avoided.
Pros to Quitclaim Deeds when moving a Property from your Name to an LLC Limiting
If you own property under your name and get sued, then your personal assets could be lost. If you have multiple properties one accident at one property could affect all of your holdings. By holding properties in multiple LLCs, only the assets of the LLC are at stake for a suit related to that property. It is possible to pierce corporate ownership of an LLC, but the LLC is a line of defense.
There are certain things property owners need to do to avoid having the LLC ownership pierced. One simple thing is to keep your personal bank accounts separate from business bank accounts.
Comingling funds between business and personal bank accounts start to show courts there is no difference to you and thus your funds are also the property of the LLC.
Rental Properties in Separate LLCs
As mentioned above, Real estate investors who own multiple properties should set up separate LLCs for each property. By doing this, investors can insulate each property from the other. One property’s assets are then protected from possible issues that arise at one of the other LLC’s property.
If someone slips and falls at one LLC, then files a lawsuit against that LCC, it is harder to pull in the assets of the other LLCs into paying off a lawsuit.
Unlike a corporation, which is subject to taxation on profits and paying out profits, a limited liability company is a “pass-through” tax entity. An LLC allows you to flow the earnings from your LLCs through to your personal income and skip paying taxes on the entity, so you don’t have to pay taxes twice.
If you have any questions feel free to reach out to speak with an attorney or subscribe for our youtube channel for more videos related to real estate.