Refinancing a rental property that is held inside an LLC (Limited Liability Company) is a common strategy for lowering interest rates, accessing equity, and improving loan terms. However, many real estate investors get bad advice from their CPAs, leading to unnecessary tax concerns and misguided fears about transferring property out of the LLC for refinancing.
Let’s clear up the confusion and walk through the correct, legal, and tax-neutral way to refinance a rental property while maintaining full asset protection.
🚨 The Common CPA Mistake: “You’ll Be Taxed If You Refinance”
A real estate investor recently told me:
“My CPA says that if I refinance my rental property, I’ll have to take the cash out as an owner draw because it’s in an LLC, and that will be taxed. Is this true?”
No. That’s completely wrong.
The reality is:
✅ If your LLC is a single-member disregarded entity or a partnership, refinancing has no tax consequences when done correctly.
✅ It’s common for banks to require temporarily transferring the property out of the LLC, refinancing in your personal name, and then moving it right back into the LLC after closing.
✅ The refinance proceeds are not taxable unless the funds are used for non-business purposes.
💡 If your CPA tells you otherwise, you need a new CPA—or better yet, consult an asset protection attorney who actually understands these structures.
🚀 The Correct Way to Refinance an LLC-Owned Rental Property
📌 Step 1: Transfer the Property Out of the LLC
Most banks won’t refinance a property inside an LLC unless you take out a commercial loan (which comes with higher interest rates and stricter terms). To get the best financing options, you may need to:
✔ Prepare a Quitclaim Deed or Warranty Deed – Transfers the property from the LLC to your personal name.
✔ File the Deed with the County Recorder – Makes the change official.
✔ Confirm with Your Lender – Some lenders require this step before approving a loan.
💡 Important: This is a temporary transfer, not a sale. No capital gains taxes or transfer taxes apply in most cases.
📌 Step 2: Refinance the Property in Your Personal Name
Now that the property is in your personal name, you can apply for a conventional mortgage, which offers:
✅ Lower interest rates compared to commercial loans.
✅ 30-year fixed loan terms (instead of 10-15 years on commercial loans).
✅ Higher cash-out potential without excessive lender restrictions.
🔹 Documents You’ll Need:
📌 Personal income verification (W-2s, tax returns, bank statements)
📌 Rental income statements
📌 Property appraisal
📌 Credit check and debt-to-income (DTI) review
💡 Pro Tip: If you’re doing a cash-out refinance, the proceeds are not taxable as long as they remain within the business or are reinvested.
📌 Step 3: Immediately Transfer the Property Back into the LLC
Once the refinance is finalized, restore asset protection immediately by re-titling the property back into your LLC.
✔ Prepare a new Quitclaim Deed or Warranty Deed – Transfers ownership back into the LLC.
✔ File the new deed with the county – Ensures the LLC is the official owner again.
✔ Update insurance and records – Inform your lender if required.
💡 Why is this step critical? If the property stays in your personal name, your personal assets could be at risk in a lawsuit, creditor claim, or liability event.
🚨 Addressing the Tax Myth Once and for All
✔ A refinance is NOT taxable income.
✔ A temporary transfer out of the LLC does NOT trigger capital gains taxes.
✔ Cash-out proceeds are NOT taxable as long as they remain within the business or reinvested in real estate.
💡 If your CPA doesn’t understand this, they’re giving you bad advice. Asset protection attorneys specialize in these matters and know how to structure these transactions correctly.
✅ Final Thoughts & Next Steps
If you’re refinancing a rental property held in an LLC, the preferred strategy is to temporarily transfer the property out of the LLC, complete the refinance, and then transfer it right back into the LLC.
👉 Need expert legal guidance? Contact Bradley Legal Corp. today to ensure your refinancing is done correctly—without unnecessary taxes or loss of asset protection. Call (888) 773-9399
By: Brian T. Bradley, Esq.
