Would this be business expense or personal??

Question

I currently own my home and I intend to do some light rehab and upgrade then move out and rent out the house. I have only recently formed my LLC and I want to be sure I keep my business finances separate from my personal so I don't lose my liability protection. I am looking into using some business funds to install central air conditioning. Since I am still living in the house, will this be crossing the line into a personal expense and therefore putting my LLC at risk of being seen as an 'imaginary' business?

Thanks for any help!

Justin B. · Answer

The answer here is simple because of what you stated.  You have an LLC with it's own banking account.  If you want to classify it as a business expense UNDER THE LLC, the LLC needs to own the asset and it needs to either be rented or being planned on rented without you living there.  It cannot be your permanent residence.  If you want to be sure to keep the veil from being "pierced", it is that simple.

Some folks may argue you can rent from the LLC or use other strategies, but just remember, we have courts, judges, and lawyers for a reason.  Laws and regulations are open to interpretation.  If you sell your house to your LLC (at a reasonable price), move somewhere else, and put your house up for rent, anything you do to that house would be under the business (a new A/C would have to be depreciated though, not expensed).  Nothing is for certain so I would say you have a 99.99% chance of keeping the veil in tact.  If you try some other strategy, that percentage starts going down quickly.  There are lots of people who have done all kinds of things and been fine, it's just because they haven't been caught or audited yet.

Seek the guidance of a tax professional before doing anything (or at least educate yourself as best you can).  I am NOT a tax professional.

Stone Teran · Answer

Like Joe said, personal expense.

Joe Splitrock · Answer

@Ryan Sanders you cannot claim the AC as a business expense unless the property is in service as a rental property. In service basically means rent-ready and you are trying to rent it like with a sign in the yard. Rehab work to put the property in service is added to the property value basis for depreciation. So even if you moved out and the property was vacant, but not available to rent, then you still cannot claim the AC as an expense. Only costs incurred after you are attempting to rent the property are expenses. You can use the improvements to increase your property value for depreciation and still gain tax benefits.

As far as your LLC, is the intent to transfer ownership of the home into the LLC? Do you have conventional financing on the home, because transferring to an LLC can violate the terms of your loan and has insurance implications. If the intent is to hold the property in your personal name, then the LLC has no value.

You should pay a CPA with experience to sit down and talk to them about all this. Most new investors converting homes to rental properties have no idea how to properly handle the tax aspect and that can get you in trouble.

Ryan Sanders · Answer

im starting to see the importance of that!

Alvin Pereira · Answer

@Ryan Sanders it's the safer bet for sure. Might be a good idea to talk to an accountant, CPA or lawyer though to be safe. I keep my CPA very close to my heart haha!

Ryan Sanders · Answer

@Alvin Pereira I was thinking the same thing. I'm thinking a personal disbursement may be the way to go

Alvin Pereira · Answer

I've had a similar experience and in Florida, it worked out for me like this. I cannot claim any business expense under my primary residence unless it was truly a business expense. For example, buying stationery for the home office, a new computer, etc.

The residence if is not used for business (the entire residence...which then gets you into zoning issues) wouldn't wualify as a business expense for remodeling or structural changes.

The only thing I could claim as business expenses were material things for my home office. This applies to liability as well.

Ryan Sanders · Answer

@Blake Meester thanks for the advice! i will search for an REI friendly attorney :)

Blake Meester · Answer

@Ryan Sanders

Limiting your liability would be a questions for an Attorney, one which I am not. As for the distribution from the LLC, it is a perfectly normal operation for an LLC to make a distribution of funds to its member(s).

I would suggest that you take the time to sit down with an attorney to understand the administrative issues and requirements of your LLC and to understand how to best protect yourself. A good attorney (one that works with REI and in your state) that understands your goals and what the LLC is in place for should be able to give you a checklist of things you need to do and advise you on the best way to achieve the transaction you are questioning and your future plans. The knowledge and planning will pay dividends down the road.

Ryan Sanders · Answer

@Blake Meester I am not all that concerned with deducting the unit on my taxes (even though that would be nice). My largest concern is opening myself to liability with using company funds to place an AC unit in my (right now) personal residence. I like the idea of using a personal disbursement to pay for the unit, but isn't that pretty transparent as well?