Buying a home is one of the most significant financial decisions most New Yorkers will ever make. Along with questions about location, price, and financing, many buyers wonder whether they should purchase their home under a Limited Liability Company (LLC). The idea is appealing on the surface: LLCs promise asset protection, potential privacy, and the separation of personal and business liabilities. But while these benefits sound attractive, the reality is far more complex. Owning a personal residence through an LLC can trigger unexpected financial, tax, and legal challenges that every homeowner should carefully consider.
A Manhattan real estate lawyer can provide invaluable guidance when weighing the advantages and risks of using an LLC to hold your home. From understanding New York’s strict transfer tax rules to managing the potential loss of homeowner tax benefits, professional legal advice ensures you avoid costly mistakes. At Avenue Law Firm, our attorneys have extensive experience advising clients on real estate ownership structures and asset protection strategies. Call us today at (212) 729-4090 to schedule a consultation and discuss the best way to protect your property and your financial future.
LLC Protection: How the “Corporate Veil” Works
To appreciate why New York property owners often turn to Limited Liability Companies (LLCs) for real estate holdings, it is important to understand the legal foundation of this structure. Under New York law, an LLC is an unincorporated business organization that exists as a legally distinct entity, separate from its owners, who are known as “members.” This separation creates what is commonly referred to as the corporate veil, a liability shield that forms the core of the asset protection strategy.
The Two-Way Liability Shield
The protection afforded by a properly structured and maintained LLC operates in both directions, safeguarding assets against risks that arise inside the company and those that originate from outside the company.
Inside-Out Protection
This is the most commonly understood benefit of the LLC structure. It ensures that an owner’s personal assets, such as savings, investments, and other properties, are insulated from liabilities tied to the property held within the LLC.
For example, imagine a guest slips on an icy walkway at a home owned by an LLC and suffers a serious injury. If the guest files a lawsuit, the claim would be made against the LLC, not the individual member personally. As a result, any judgment awarded would generally be limited to the assets owned by the LLC, typically, the property itself. The member’s personal bank accounts, vehicles, or investment portfolio would remain beyond the creditor’s reach.
Outside-In Protection
LLCs also work in the opposite direction by shielding the property held inside the entity from liabilities arising in the member’s personal life.
Suppose an LLC member is sued due to an unrelated personal matter, such as a car accident, a defaulted personal loan, or a financial dispute involving another business venture. Because the LLC is a separate legal entity, a creditor cannot simply force the sale of the property owned by the LLC to satisfy the member’s personal judgment. This safeguard makes the structure especially attractive to individuals with high personal financial exposure, such as business owners, physicians, or professionals in other high-liability fields.
Manhattan Real Estate Lawyer Peter Zinkovetsky
Peter Zinkovetsky
Peter Zinkovetsky, Esq., is the founder and managing partner of Avenue Law Firm, a top-rated Manhattan real estate practice. Recognized as a Super Lawyers Rising Star for eight consecutive years, Peter has built a strong reputation representing both local and international clients in complex real estate transactions. His work has also earned him accolades from the New York Real Estate Journal and a 10/10 rating from Avvo.
Beyond client representation, Peter is a thought leader in New York real estate law. He frequently teaches continuing education courses, contributes to legal publications, and speaks at industry conferences worldwide. His insights have been featured in outlets including Forbes, The Real Deal, Newsweek, and the New York Post. Fluent in English, Russian, and Ukrainian, Peter brings both depth of knowledge and a global perspective to every matter he handles.
The Practical & Financial Hurdles of Placing a Home in an LLC
While the theoretical protection of an LLC is compelling, New York homeowners quickly encounter a series of formidable practical and financial obstacles. These challenges often act as deal-breakers, making the strategy untenable for the average homebuyer and financially punitive for many others.
The Mortgage Impasse: A Deal-Breaker for Most Buyers
Perhaps the single greatest obstacle is financing. Traditional residential mortgage lenders, including those who issue government-backed loans through the Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac, are overwhelmingly unwilling to lend to an LLC. From the lender’s perspective, the logic is simple: the same liability shield that protects homeowners also complicates the bank’s ability to hold members accountable for debts. In practice, this makes foreclosure and debt recovery more difficult if the LLC defaults.
As a result, buyers seeking to place a home in an LLC are often pushed into the commercial lending market. Unfortunately, these alternatives such as commercial loans, private financing, or asset-based lending tend to come with unfavorable terms. Interest rates are typically higher than those for conventional residential mortgages. Down payments of 25 percent or more are frequently required. Repayment schedules are often compressed into shorter amortization periods, resulting in significantly higher monthly payments.
Even more problematic, most commercial lenders require the LLC’s members to sign a personal guarantee. This guarantee means the members themselves are personally responsible for repaying the debt if the LLC defaults. In effect, the owner must personally backstop the mortgage, undermining one of the key asset protection benefits the LLC was intended to provide.
Giving Up Your Homeowner Tax Benefits
The disadvantages do not stop with financing. By placing a primary residence in an LLC, homeowners must forfeit two of the most valuable tax benefits available under federal and New York law.
The first is the federal capital gains exclusion. Section 121 of the Internal Revenue Code allows individual homeowners to exclude up to $250,000 of capital gains from the sale of a primary residence, or up to $500,000 for married couples filing jointly, provided they have lived in the home for at least two of the past five years.
If you title a primary residence in a single-member, disregarded LLC, the owner is generally treated as owning the home directly for federal tax purposes, so the §121 home-sale exclusion can still apply if you meet the ownership and use tests. By contrast, if the home is owned by a multi-member LLC/partnership, §121 typically does not apply to the individual members.
The second is the potential loss of property tax relief programs. New York’s School Tax Relief (STAR) program and other local exemptions are designed to reduce the tax burden on primary residences. Once a home is legally owned by a business entity such as an LLC, eligibility for these programs may be compromised or lost entirely.
The Cost of Compliance in New York
Even if financing and tax issues could be managed, the ongoing costs of forming and maintaining an LLC in New York present another barrier. Homeowners must budget for filing fees, ongoing compliance obligations, and the professional services often required to manage them.
Forming an LLC requires filing Articles of Organization with the New York Department of State, which carries a $200 fee. Once the LLC is established, the state imposes a biennial reporting requirement with a $9 filing fee. While modest, these expenses are only the beginning. Most LLC owners will also need to retain legal and accounting professionals to draft an operating agreement and handle tax filings, which adds recurring professional costs.
The most notorious requirement, however, is New York’s publication rule. Section 206 of the Limited Liability Company Law mandates that every new LLC publish a notice of its formation in two newspapers, one daily and one weekly, for six consecutive weeks. After publication, proof must be filed with the state for an additional $50 fee. Depending on the county, publication costs range from several hundred dollars in upstate regions to more than $1,200 in New York City. This antiquated rule, unique to New York, makes establishing an LLC substantially more expensive than in most other states.
The “Due-on-Sale” Trap for Current Homeowners
For homeowners who already hold a mortgage and are considering transferring their property into an LLC, a hidden danger often lurks in their loan documents: the “due-on-sale” clause. This provision gives the lender the right to demand full repayment of the loan if the property is transferred without the bank’s consent.
Moving a deed from an individual’s name into an LLC’s name triggers exactly that kind of transfer. While some lenders may grant a waiver, they are under no obligation to do so. If the lender enforces the clause, the homeowner could be required to pay off the entire remaining balance immediately. For many, this risk makes transferring an already-mortgaged property into an LLC financially untenable.
| Hurdle | Why it is a problem | Typical financial impact |
|---|---|---|
| The Mortgage Impasse | Traditional residential mortgage lenders (FHA, Fannie Mae, Freddie Mac) rarely lend to LLCs. Owners are pushed into commercial loans requiring higher interest rates, shorter terms, and personal guarantees. | Commercial loan rates often 1–3% higher than standard mortgages; 25% or more down payments; shorter amortization resulting in higher monthly payments. |
| Giving Up Homeowner Tax Benefits | Homes in multi-member LLCs usually lose access to the federal capital gains exclusion and may become ineligible for New York’s STAR property tax relief. | Loss of up to 250,000–500,000 in tax-free capital gains on sale; higher ongoing property taxes without STAR. |
| The Cost of Compliance in New York | Forming and maintaining an LLC requires filing fees, biennial reports, legal and accounting costs, and compliance with the state’s publication rule. | Articles of Organization: 200; Biennial fee: 9; Publication: 300–1,200 depending on county; legal/accounting: 1,000 or more annually. |
| The Due-on-Sale Trap | Transferring a mortgaged property into an LLC can trigger the lender’s due-on-sale clause, requiring immediate payoff unless waived. | May require repayment of the entire outstanding mortgage balance immediately. |
How New York Courts Can “Pierce the Corporate Veil”
The most profound risk of using an LLC for a personal home is not financial but legal. The possibility that a court could disregard the LLC’s liability shield entirely represents the Achilles’ heel of this strategy. This legal doctrine, known as “piercing the corporate veil,” is especially threatening when the property is a personal residence because the way owners live in their homes naturally blurs the line between personal and business use.
Defining the “Alter Ego” Theory
New York courts will set aside limited liability protection if a plaintiff can prove that the LLC is not truly separate from its owner but merely an “alter ego.” The standard is demanding: a plaintiff must typically show that the owner exercised “complete domination” over the LLC and used that control to commit a fraud or a wrong that caused harm. While proving outright fraud can be difficult, establishing a “wrong” is often much easier. A disregard for the legal separation between the LLC and its member, especially when the property is a home, can be enough.
Critical Errors that Invalidate Protection
The daily realities of living in an LLC-owned home create many opportunities for mistakes. These errors give plaintiffs and courts the justification to pierce the veil.
- Commingling Assets: This is the most damaging mistake an owner can make. Paying household bills from the LLC’s bank account or paying the LLC’s property taxes from a personal account destroys the separation between the individual and the entity. Every financial transaction must be kept strictly separate.
- Failure to Observe Formalities: Although LLCs are more flexible than corporations, New York law still requires certain formalities. A written Operating Agreement must be adopted within 90 days of formation. The LLC should also maintain its own financial records and document major decisions. Neglecting these obligations can be used as evidence that the entity is not being treated as independent.
- Personal Use Without a Lease: Perhaps the most counterintuitive requirement is that an owner cannot simply live in a home owned by their LLC without a lease. To preserve the separation, the owner must execute a formal lease with the LLC and pay fair market rent every month. That rent must then be deposited into the LLC’s bank account. This arrangement not only creates significant administrative burdens but also generates taxable rental income for the LLC. Missing even one rent payment or paying for a home repair from a personal account can serve as powerful evidence in a lawsuit that the LLC is only a façade.
Living in the property while trying to maintain strict separateness creates an ongoing risk of missteps. The natural inclination to treat the home as a personal possession is precisely what makes it easier for plaintiffs to argue that the LLC is not legitimate.
A Sobering Look at New York Case Law
New York courts have long recognized the importance of corporate separateness but have not hesitated to pierce the veil when justice requires it. In Morris v. New York State Department of Taxation & Finance, the state’s highest court reaffirmed that veil piercing is an exceptional remedy, but one that will be applied when owners abuse the protections of limited liability. Similarly, in cases such as In re 91st Street Crane Collapse Litigation, courts disregarded the separateness of multiple entities when they were run as a single enterprise without respect for their formal structures.
For a homeowner who uses an LLC to hold their residence, this precedent is sobering. Treating the home as if it were personally owned gives opposing counsel exactly the evidence they need to persuade a court to dismantle the liability shield. What began as a strategy for protection can quickly unravel if the owner blurs the line between self and entity.
State-Specific Rules You Cannot Ignore
Beyond the universal challenges of using LLCs for personal residences, New York adds its own unique layers of legal and regulatory complexity. Buyers and homeowners must contend with state and city tax laws, as well as new transparency requirements that have fundamentally changed the landscape.
New York Real Estate Transfer Tax
Both New York State and New York City impose a Real Estate Transfer Tax (RETT) on the conveyance of property. Transferring a property’s deed into an LLC is treated as a taxable event.
- New York State RETT: The state levies a tax of 0.4 percent, or two dollars for every five hundred dollars of consideration. In addition, a supplemental one percent “mansion tax” applies when the consideration is one million dollars or more.
- New York City RPTT: The city has its own Real Property Transfer Tax with tiered rates. For residential properties, the tax is one percent if the consideration is five hundred thousand dollars or less, and 1.425 percent if it is above five hundred thousand dollars. For commercial and other property types, the rate can be as high as 2.625 percent.
Importantly, these taxes apply not only when a deed is directly transferred but also when a controlling interest in an entity that owns New York real estate changes hands. A controlling interest is defined as 50 percent or more of the capital, profits, or beneficial interest in the LLC. The consideration for tax purposes is based on the fair market value of the real property, adjusted by the percentage of ownership being transferred.
This framework was created to prevent property owners from avoiding the tax by selling shares in the LLC rather than transferring the property itself. New York City also applies strict aggregation rules, which combine multiple smaller transfers over time to determine whether a controlling interest has effectively been conveyed.
The NY LLC Transparency Act and the End of Anonymity
A recent legislative development has eliminated one of the perceived advantages of holding property in an LLC. Historically, many buyers used LLCs for privacy, since public records showed only the name of the LLC rather than the name of the individual owner. That benefit is about to end.
The New York LLC Transparency Act (NYLTA), signed into law and scheduled to take effect on January 1, 2026, was enacted to combat the use of anonymous LLCs for purposes such as money laundering and tenant mistreatment. The law requires every LLC formed or authorized to do business in New York to disclose personal information about its beneficial owners to the New York Department of State.
A beneficial owner is defined as any individual who directly or indirectly exercises substantial control over the LLC or owns or controls at least 25 percent of its ownership interests. The required disclosures include the owner’s full legal name, date of birth, and residential address. While the final law limits access to this database to government and law enforcement agencies, the fact remains that anonymity will no longer exist.
For homeowners who valued LLC ownership as a way to shield their identity, this development is critical. The new law structurally undermines a major pillar of the pro-LLC argument.
Protecting Your Home the Right Way
While placing a home in an LLC may appear to offer strong asset protection, the practical realities in New York often make this strategy more burdensome than beneficial. From financing hurdles and lost tax benefits to strict compliance requirements and the risk of veil piercing, homeowners face significant obstacles that can outweigh the perceived advantages. Add to this New York’s unique transfer taxes and the new LLC Transparency Act, and it becomes clear that the decision is not one to make lightly.
Before moving forward, it is essential to consult with an experienced real estate attorney who understands both the opportunities and the risks of LLC ownership. At Avenue Law Firm, our Manhattan real estate lawyers guide clients through complex property ownership questions and help craft strategies tailored to their individual goals. Call (212) 729-4090 today to schedule a consultation and take the right steps toward protecting your home and your financial security.
