Most conventional lenders will not underwrite a loan to an LLC, so the standard approach is to deed the property into your personal name, close the refinance, and deed it back. That sequence works and it is used constantly. Two things about it are almost never explained: the transfer back into the LLC is not protected by the Garn-St Germain Act, and the tax concern your CPA raised is probably a real one — just not the one they described.
This page covers the sequence, the exposure window inside it, and the two questions that actually matter.
Key Points
- Taking title in the LLC at purchase avoids every issue on this page. No transfer, no transfer tax, no due-on-sale question.
- A refinance is not taxable income. Loan proceeds are debt, not income.
- But distributions can be, in a multi-member LLC, if they exceed your outside basis. That is the legitimate version of the CPA concern.
- The deed back into the LLC is a due-on-sale trigger. No federal exception covers transfers into entities.
- A trust is treated differently. Agency guidelines often let a revocable inter vivos trust stay on title, and the transfer back is federally protected.
- Proportional ownership is what keeps the transfer tax-neutral. The LLC should be owned in the same shares the property was held.
- You are unprotected during the window between deeding out and deeding back. Time it deliberately.
- A conventional loan means a personal obligation regardless of who holds title afterward.
Why This Comes Up
A real estate investor asked me a version of this recently:
“My CPA says that if I refinance my rental, 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?”
A refinance is not a taxable event. Borrowing money is not income — you have an offsetting obligation to repay it. That part of the concern is misplaced.
But the CPA may be pointing at something real, and the version of this article that just says “get a new CPA” misses it. More on that below, because getting it right is the difference between sounding confident and being correct.
Why Lenders Push the Property Out of the LLC
Because conventional residential underwriting is built around individual borrowers. Lending to an entity generally moves you into commercial terms — shorter amortization, higher rates, and usually a personal guarantee anyway.
Most conventional lenders will not write a residential loan to an LLC. The Fannie and Freddie guidelines that produce thirty-year fixed pricing contemplate an individual borrower.
Your options are effectively two.
Borrow as an entity on commercial terms. Shorter amortization, often five to ten years with a balloon. Higher rates. Rate resets. And in nearly every case, a personal guarantee — which means the entity structure does not shield you from that debt regardless.
Or take the property out, borrow personally, and put it back. Better rates, longer terms, more cash-out capacity, and a sequence lenders and title companies handle routinely.
The second is usually the right answer economically. It also has consequences the first does not.
The Sequence
Step one: deed the property out of the LLC
Use a warranty deed rather than a quitclaim where your title situation permits it. A quitclaim conveys whatever interest you have without warranting anything, and in some circumstances it can complicate a title insurance claim later. Your title company will have a view; ask before recording.
Record the deed with the county recorder.
Confirm with the lender first. Some require the transfer completed before underwriting; some want it at closing.
Check your state’s transfer tax and reassessment treatment before you record. States differ significantly. Some impose documentary stamp or realty transfer tax on deeds even between related parties, sometimes measured against the outstanding mortgage balance rather than the equity. Some trigger a property tax reassessment on a change in ownership. Many states exempt transfers where beneficial ownership does not change — but the exemption is not universal and it is not automatic.
And this is where proportional ownership matters more than most people realize.
The reason a transfer between you and your own LLC usually escapes transfer tax and reassessment is that beneficial ownership has not changed. That works only if the LLC is owned in the same proportions as the property was held.
If a husband and wife own the property jointly, the LLC should be owned by husband and wife in the same shares. If the proportions differ — one spouse holds the property but both own the LLC, or the split is 60/40 against a 50/50 deed — you may have created an actual change in beneficial ownership, and with it a taxable transfer and a reassessment event.
That alignment should have been established when the LLC was first funded, and it should be preserved through the refinance. Deeding out to one spouse and back to a jointly held LLC is the kind of small mismatch that produces a tax bill nobody anticipated.
Confirm with your local taxing authority and clerk of court before recording, in both directions.
Step two: refinance in your personal name
Conventional underwriting applies. Personal income verification, rental income statements, appraisal, credit and debt-to-income review.
You are now personally obligated on the note. That does not change when the property goes back into the LLC. The entity holds title; you hold the debt.
Step three: deed the property back
Do this promptly. Every day the property sits in your personal name is a day it is exposed to a personal judgment and a day a claim arising at the property reaches you directly.
Record the new deed. Update your insurance so the named insured matches the record owner — a mismatch can create a coverage problem at exactly the wrong time.
⚠️ What Nobody Tells You About Step Three
The transfer back into the LLC is a due-on-sale trigger. The Garn-St Germain Act protects transfers into an inter vivos trust. It does not protect transfers into an LLC, a partnership, or a corporation. There is no entity exception.
Under 12 U.S.C. §1701j-3(d), federal law lists nine situations in which a lender may not exercise a due-on-sale clause. Subsection (d)(8) covers a transfer into an inter vivos trust where the borrower is and remains a beneficiary and occupancy rights do not change.
None of the nine covers a transfer into an entity.
So when you deed the property back into your LLC, you have made a transfer of an interest in the property, and the due-on-sale clause in the loan you just closed applies on its terms.
In practice, most lenders do not act on it. The loan is performing, the payments arrive, and calling it means finding a new borrower. That is a business calculation and it holds most of the time.
A business calculation is not a legal protection. It can change when rates move, when the loan is sold to a servicer with different practices, or when the loan stops performing for some unrelated reason.
What to do about it:
Ask the lender for written consent to the transfer into an entity you control, given that you remain personally liable. Some will give it. A written consent removes the question permanently and costs one conversation.
Negotiate it into the new loan. If you are refinancing anyway, raise the entity structure during underwriting rather than after closing.
Or proceed knowingly. Many investors accept this exposure on a performing loan they intend to hold. That should be a decision made with the facts in front of you — not something you discover two years later. Most law firms and attorneys do not involve the lender or banks in the process at all. If the lender or bank has a question, that is what your attorney is for.
The Trust Is Treated Differently — and That Matters
A property held in a revocable inter vivos trust can often stay on title through a refinance under standard agency guidelines. Where a lender objects, the same deed-out sequence applies — but the transfer back is federally protected.
This is the distinction that makes trust-held property easier to finance than entity-held property.
Standard agency guidelines generally permit a revocable inter vivos trust to remain on title, provided the trust meets certain requirements and at least one settlor qualifies as a borrower. Many lenders will simply close with the trust on title. Some prefer the deed-out sequence anyway.
And where they do, the transfer back is protected by §1701j-3(d)(8) — assuming the property is residential with fewer than five dwelling units, you remain a beneficiary, and occupancy rights are unchanged.
If a lender threatens to accelerate on that transfer, they are wrong on the law. Ask them to identify the provision of Garn-St Germain that permits it. There is not one.
One trap worth naming. Some lenders will offer to refinance a trust-held property on the condition that the trust be amended. Those amendments frequently strip out the protective provisions the trust exists to provide. Do not ever amend the trust to get a loan. Deed out, refinance, deed back — or find a different lender. A better rate is temporary; a gutted trust is not.
Now the Tax Question, Properly Answered
The refinance is not taxable. But in a multi-member LLC taxed as a partnership, distributing the proceeds can produce gain if the distribution exceeds your outside basis. That is what a careful CPA is worried about, and it usually does not happen — for a specific reason worth understanding.
Start with what is straightforwardly true. Borrowing is not income. A refinance produces loan proceeds and an offsetting liability. There is no taxable event in the borrowing itself.
Where it gets more interesting is the distribution.
If the LLC is a single-member disregarded entity, there is no separate entity for income tax purposes. Moving money between yourself and the LLC has no tax consequence, because the tax law does not see two parties.
If the LLC is taxed as a partnership, the analysis is different. Under IRC §731(a)(1), a distribution of money in excess of a partner’s adjusted outside basis produces recognized gain.
But here is why it usually does not bite on a refinance. Under IRC §752, an increase in a partner’s share of partnership liabilities is treated as a contribution of money — which increases outside basis. When the partnership borrows, your share of that new debt raises your basis before the distribution reduces it.
So the refinance itself typically creates the basis that supports the distribution. The order of operations is what makes it work.
When it can still be a problem: where basis was already depleted by prior distributions or accumulated losses, where the debt allocation among partners does not track the distribution, or where nonrecourse liability allocation rules produce a different result than expected.
Which is why the honest answer is not “your CPA is wrong.” It is: the refinance is not taxable; whether the distribution is depends on your basis and how the debt is allocated, and that is a question for your CPA with your actual numbers in front of them.
If your CPA said the refinance itself is taxable, that is incorrect. If they said “let me check your basis before we distribute the proceeds,” they are doing their job.
The Exposure Window
Between deeding out and deeding back, the property is in your personal name and it is not protected.
Two exposures run during that period. A personal judgment against you can attach to the property. And a claim arising at the property — a tenant injury, a premises claim — reaches you directly rather than stopping at the entity.
That window is usually short, and the risk is usually acceptable. But it is real, and two things reduce it.
Time it deliberately. Do not deed out months before you expect to close. Coordinate with the lender so the property sits exposed for the shortest period the process allows.
And do not do this while a claim is pending or foreseeable. Moving property out of an entity while a claim exists is a different transaction with a different analysis, and moving it back can be attacked as a voidable transfer.
The Better Answer: Take Title in the LLC From Day One
Every problem on this page — the transfer, the transfer tax, the reassessment, the due-on-sale exposure, the window where the property sits unprotected — exists because the property started in your personal name. A purchase closed directly into the LLC has none of them.
If you are buying a property, take title in the entity at closing.
Your lender can work with it. Your title company handles it routinely. It changes the loan product you qualify for, which is a real trade-off — but it eliminates every downstream question this article exists to answer.
And if you already hold property personally, that is the position to fix. A creditor running a title search finds everything titled in the defendant’s name in a single query. Properties bought with the intention of transferring them “later” have a way of still being in personal name five and ten years on, and by then there is a portfolio sitting in the most exposed position available.
One condition, and it is absolute. Transfer only while no claim exists or is foreseeable. Moving title after a claim appears is a different transaction with a different analysis, and it is attackable as a voidable transfer under state law and under 11 U.S.C. §548 in bankruptcy. If you are already in litigation, talk to an attorney before touching anything.
FAQs
Is refinancing a rental property in an LLC a taxable event? No. Loan proceeds are debt, not income. Whether distributing those proceeds produces gain depends on your outside basis in a partnership-taxed LLC, and typically the debt increase under IRC §752 supports the distribution.
Why won’t my lender refinance the property while it’s in the LLC? Conventional residential underwriting is built around individual borrowers. Lending to an entity usually means commercial terms — shorter amortization, higher rates, and generally a personal guarantee.
Will the lender call the loan when I deed it back into the LLC? They can. There is no Garn-St Germain exception for transfers into entities. Most lenders do not act on a performing loan, but that is a business decision rather than legal protection. Asking for written consent removes the question.
Is it different if the property is held in a trust? Yes. Agency guidelines often permit a revocable inter vivos trust to stay on title, and where a lender requires the deed-out sequence, the transfer back is protected under 12 U.S.C. §1701j-3(d)(8).
Do I owe transfer tax when deeding out and back? Depends on your state. Many exempt transfers between an entity and its members, but not all, and some measure the tax against the mortgage balance. Confirm before recording.
How do I avoid transfer tax and reassessment on the deed out and back? Generally by not changing beneficial ownership — which means the LLC should be owned in the same proportions the property was held. A mismatch between how the deed reads and how the LLC is owned can create an actual ownership change, and with it a taxable transfer. Confirm with your local taxing authority in both directions.
Should I use a quitclaim or a warranty deed? Ask your title company. A quitclaim conveys without warranty and can complicate title coverage in some circumstances.
Should I just buy the next property in the LLC? Yes, where you can. Taking title in the entity at closing eliminates the transfer, the transfer tax question, the reassessment question, and the due-on-sale exposure entirely. It changes which loan products you qualify for, which is the trade-off to weigh.
Am I still personally liable if the LLC holds title? Yes, on that loan. You signed the note. The entity holds title; you hold the debt.
How long is the property unprotected? From the moment you deed it out until you deed it back. Coordinate timing with the lender to keep that window short, and do not run the sequence while a claim is pending or foreseeable.
What if I have a personal guarantee on a commercial loan? Then the lender has a direct claim against you regardless of title, and the entity structure does not address that debt. Know which of your loans carry guarantees.
The Bottom Line
Deed out, refinance, deed back is the right sequence and it works. Most investors and most lenders handle it routinely.
Two things deserve more attention than they usually get.
The transfer back is not federally protected. Garn-St Germain covers trusts, not entities. Get written consent if you can, and understand the exposure if you cannot.
And the tax question has a real answer, not a dismissal. The refinance is not taxable. Whether the distribution is depends on basis and debt allocation, and that is a conversation with your CPA rather than an argument with them.
Structure before stress.
📞 For a confidential legal consultation, contact Bradley Legal Corp. at (888) 773-9399, or complete the intake questionnaire at btblegal.com.
By: Brian T. Bradley, Esq.
