By Elyssa Matson Jones

When considering how to protect and manage an investment property, many owners explore forming a Limited Liability Company (LLC). While an LLC can offer legal and financial benefits, it’s essential to understand the setup and maintenance costs, tax implications, and potential liability issues, especially in California. Here’s what to know if you’re thinking about moving your property from your personal name into an LLC.¹

Forming an LLC shields personal assets while streamlining property management for long-term success.

1. Cost of Setting Up and Maintaining an LLC

Setting up an LLC in California typically involves:

• Formation Costs: Forming an LLC includes a filing fee with the Secretary of State, which is currently $70, plus additional service costs if you choose a platform like LegalZoom, where packages range from $149 to over $500.
• Annual Maintenance: California LLCs pay an $800 annual franchise tax (an annual fee paid to operate in the state), regardless of income, plus a fee based on annual gross receipts (total income before expenses) if income exceeds $250,000. Keeping the LLC in compliance means filing an annual report and tax returns, which may incur additional accounting costs.²

2. Tax Implications of Transferring Property to an LLC

LLCs offer a “pass-through” tax structure, meaning income and losses pass directly to the owner’s personal tax return without being taxed at the corporate level. However, when transferring a property into an LLC, there are potential tax consequences to be aware of:

• Property Tax Reassessment: In California, transferring property from a personal name to an LLC can trigger a property tax reassessment, potentially increasing your property taxes. However, you can avoid this by ensuring that the ownership interest in the LLC remains consistent with the original personal ownership. Consulting with a CPA or real estate attorney can clarify your specific situation and help avoid unintended tax assessments.³
• Transfer Tax: Some counties in California may impose a transfer tax (a tax on the sale or transfer of real property) when ownership changes, even if it’s just moving into an LLC. Check with local regulations to estimate these costs.

3. Limited Liability Protection

One of the most attractive benefits of moving a property to an LLC is limited liability protection. This means if a tenant or third party files a lawsuit related to the property, the LLC can help shield the owner’s personal assets. However, limited liability is not absolute, maintaining proper separation between personal and LLC finances and operations is essential to ensure protection. This requires keeping separate bank accounts, records, and finances to show that the LLC is operating independently.

4. California Tenant Protection Act (TPA) Implications

The California Tenant Protection Act (TPA), which limits rent increases and provides eviction protections, generally applies to multi-unit properties. Single-family homes and condos, however, have specific exemptions if they’re owned in a personal name or a trust (a legal arrangement where a trustee holds assets for beneficiaries). Transferring a single-family rental to an LLC may remove this exemption depending on ownership structure, subjecting the property to TPA rent control and eviction regulations. For owners looking to avoid these restrictions, keeping the property in a personal name may be advisable.⁴

An LLC isn't a shield against all risks, proper management is key to true protection.

5. Common Misconceptions About LLCs

There are a few common misunderstandings about LLCs that can affect your decision:

• “LLCs eliminate all personal liability”: While LLCs do offer personal liability protection, this protection is not absolute. Courts can still hold owners personally responsible in cases where personal and business finances are not kept separate or in instances of fraud or misconduct.
• “LLCs provide automatic tax benefits”: LLCs can offer “pass-through” taxation, meaning profits are taxed at the owner’s personal rate rather than as corporate income. However, without the correct tax setup and planning, tax savings are not automatic and require careful management. 
• “An LLC structure is always best for rental properties”: While LLCs can be helpful for legal protections, they can complicate tax structures and have unintended consequences, like removing a single-family home’s TPA exemption.

Is an LLC Right for You?

An LLC can be an excellent choice for property owners who prioritize liability protection and can handle the associated administrative and tax considerations. However, California’s stringent laws around property reassessment and TPA compliance mean owners should weigh the costs and potential regulatory impact. For single-family homes, particularly those intended for rent, the risk of triggering TPA regulations when transferring ownership to an LLC is crucial to consider.

Final Thoughts and Next Steps

Moving a property into an LLC is a significant decision with legal and financial impacts. Before making this shift, consulting with a CPA, real estate attorney, and or a tax professional is highly recommended. They can help you understand both the short- and long-term financial impacts and assess your goals and risk profile.

If you’ve had experience transferring your property into an LLC, feel free to share your insights in the comments.

Related Reading

• Leasing & Screening for Investment Rentals – Strategies to select tenants that align with your LLC structure.
• Security Deposits in California (July 2024) – How deposit rules interact with LLC ownership.
• Understanding California's SB 721: Balcony Inspections – Compliance tips for multi-unit LLC-held properties.