🏡 Why Texans Should Not Put Their Homestead in an LLC
For Texans looking to protect their assets, reduce liability, and organize their affairs, the idea of putting their personal residence (homestead) into a Limited Liability Company (LLC) can sound appealing—especially if they’ve heard of wealthy investors or business owners doing something similar with rental properties.
But here’s the problem: Putting your primary residence—your homestead—into an LLC in Texas can backfire in big ways.
This blog unpacks the legal, tax, and practical reasons why most Texans should avoid placing their homestead in an LLC, and what you should consider doing instead to protect your property.
🏠What is a Homestead in Texas?
Under Texas law, a homestead refers to your primary residence—the place where you live. Texas offers some of the most generous homestead protections in the nation, including:
- Protection from Creditors: Most creditors (except mortgage lenders, taxes, and certain legal claims) can’t force the sale of your homestead.
- Property Tax Benefits: Homestead owners qualify for a property tax exemption that reduces their annual tax bill.
- Capital Gains Exclusion: You can exclude up to $250,000 (or $500,000 for married couples) of gain from the sale of a homestead under IRS Section 121.
To qualify, however, you must own the home in your personal name (or living trust) and use it as your primary residence. Putting the property into an LLC generally voids these advantages.
⚠️ Why You Shouldn’t Put Your Homestead in an LLC in Texas
1. You’ll Lose the Homestead Exemption
Texas law is clear: Only natural persons can claim the homestead exemption. An LLC is a separate legal entity, not a person.
👉 That means if you deed your home to an LLC, you forfeit your homestead tax exemption—costing you hundreds or thousands in extra property taxes every year.
2. You Risk Losing Asset Protection
This might surprise you: Texas already provides excellent protection for your homestead—even better than what an LLC can offer in many cases. Unless you’re facing foreclosure, unpaid property taxes, or a mechanic’s lien, most creditors can’t touch your homestead.
By transferring your house into an LLC:
- You give up those state-level protections.
- You expose the home to liabilities related to the LLC (like lawsuits against the LLC).
- You confuse ownership, which can backfire during litigation or estate administration.
3. It May Trigger a “Due on Sale” Clause
Many mortgages contain a “due on sale” clause, which allows the lender to demand full repayment of the loan if the property is transferred to someone else—including an LLC.
Although some banks overlook intra-family LLC transfers, you could be putting your mortgage at risk, especially if the transfer isn’t disclosed.
4. You Lose Section 121 Capital Gains Exclusion
If your house is titled in your name, you may be able to exclude a large portion of the gains when you sell your home. But when the home is titled in an LLC, that exclusion disappears because the LLC—not you—is considered the seller.
That can mean tens of thousands in unnecessary capital gains taxes if the property appreciates.
5. Insurance Can Get Messy
Homeowner’s insurance is based on owner-occupancy. If your house is owned by an LLC but you live in it, the insurance company might:
- Deny claims because the policy is improperly structured
- Cancel your policy entirely for misrepresentation
6. Estate Planning and Step-Up in Basis Complications
One major estate planning benefit of holding a home in your name (or revocable trust) is the step-up in basis at death. This means your heirs can sell the property with little to no capital gains taxes.
If your homestead is owned by an LLC, it might not qualify for a full step-up, especially if the LLC interest is treated as business property. That can mean more taxes for your kids down the road.
🧠What’s a Better Way to Protect Your Homestead?
If you want to avoid probate, simplify management, and maintain creditor protection, here are safer alternatives:
âś… 1. Use a Living Trust
- Avoids probate
- Maintains full homestead protection
- Preserves your capital gains tax exclusion and step-up in basis
- Keeps ownership in your name (or your trust’s name)
- Ideal for Texans who want privacy, speed, and flexibility in estate planning
A trust is often the best way to own your home without giving up legal protections or financial perks.
âś… 2. Use a Transfer on Death Deed (TODD)
This simple document allows your home to pass to your heirs outside of probate, while you still:
- Own the home during life
- Retain the homestead exemption
- Keep your mortgage and tax status unchanged
It’s a solid option for Texans who want a fast, low-cost solution.
âś… 3. Use Umbrella Insurance for Liability Protection
If your concern is liability exposure, especially if you have a pool or host guests, consider a $1M+ umbrella insurance policy. It’s cheap and effective—and doesn’t jeopardize your homestead protections.
🧾 Final Word: When Does It Ever Make Sense?
There are rare exceptions where putting a home in an LLC might make sense:
- You rent out the property full-time
- You use the home as a short-term rental (e.g., Airbnb)
- You co-own the property with non-relatives for investment purposes
But even then, it’s not your homestead—it’s an investment property. For a true homestead, stick with a living trust or TOD deed.
âś… Want to Keep Your Home Protected the Right Way?
At Mike Massey Law, we help Texans title their homes properly for asset protection, probate avoidance, and tax efficiency. We offer flat fees, fast service, and 500+ five-star reviews across Austin, Houston, and beyond.
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This blog is for informational purposes only and does not constitute legal advice. Reading this blog does not create an attorney-client relationship. For personalized legal guidance, please contact a licensed attorney in your jurisdiction.
