Many property owners hesitate to move real estate into an LLC because they fear triggering the due-on-sale clause in their mortgage. This concern is understandable, especially if you have a low-interest mortgage that you don’t want to refinance. The good news? In most cases, you don’t need to worry.

What is the Due-On-Sale Clause?

The due-on-sale clause is a provision in many mortgage contracts that allows the lender to demand full repayment of the loan if the property is transferred to another owner. For some, this clause can feel like a roadblock when considering asset protection strategies like forming an LLC.

Why Moving Property into an LLC Usually Isn’t a Problem

There are several reasons why transferring your property into an LLC typically does not trigger the due-on-sale clause:

1. Lenders often won’t know. Unless you explicitly notify the bank, they usually have no way of tracking property transfers into an LLC. As long as you continue making mortgage payments, the lender has no reason to take action.

2. Lenders may not care. Many mortgages are sold to multiple financial institutions, making enforcement complicated and unlikely.

3. Enforcement is costly and risky. Forcing a borrower to refinance can create complications for the lender, especially if the borrower doesn’t qualify for the new loan terms.

4. Government regulations protect borrowers. If the LLC is structured similarly to the original loan owners (for example, you and your spouse forming a joint LLC), federal regulations prevent lenders from enforcing the due-on-sale clause in this scenario.

When to Consider Using an LLC

Using an LLC for investment properties is often a smart move for asset protection and liability management. It can shield your personal assets from potential claims related to the property. For your personal residence, the benefits are generally less clear, so many choose not to transfer their primary home into an LLC.

Final Thoughts

If you’re considering moving real estate into an LLC, don’t let the fear of the due-on-sale clause hold you back. With proper planning and understanding of the rules, this strategy can enhance your estate planning and asset protection.

For more guidance on estate planning, probate, or real estate strategies in Washington, consult a knowledgeable estate planning attorney.

Christopher Small, Owner of CMS Law Firm