I have searched for this all day, but perhaps my google-fu or my insufficient REI lexicon isn't allowing me to find the right results.
I just purchased a fourplex and will be occupying while renovating. Two of the units need work, the other two are nicely upgraded. I haven't YET started an LLC, so I am currently just a personal entity - if that matters.
The question is: Do I pay myself rent? I am setting up Cozy right now and using myself as a test environment to see what my tenants' experiences will be, and the matter of rent amount came up. I will be collecting all rent into a separate, business-only personal checking account.
To me it seems like a big ouroboros, but perhaps you savvy investors can identify a well-known tax advantage or business/bookkeeping advantage to approaching this one way or another. What say?
I think it's wise to keep a separate operating account from your personal funds. Further, I think it's good idea (and maybe a statutory requirement depending on your state), to keep security deposits in their own separate account. I have 5 properties, and my setup is:
- 1 operating bank account for all rentals (where rent goes and expenses are paid from).
- 5 accounts with check writing abilities - one for each property - where I store the security deposit, and nothing else!
hmm; Interesting question re paying yourself rent.
The sum of the rents is GSI and if you sell later, this is the number an investor would want to see - - GSI less expenses = NOI and that's a go/no go number for MFU investors.
If you're planning to buy-n-hold, forget it. If you're end-game is short term, it's a good strategy. BY ALL MEANS, if you do this, write the checks and make the payments (you might get an audit and escape the problem with truth)
No, you don't pay yourself rent. If you live in 1 unit and a 2nd is being renovated, you treat 3/4 of the building as part of your business and 1/4 as personal. You can't just deduct 100% of your insurance, etc if you live in it.
@Lucas Hall - Thanks for the response. That's currently how I'm handling things and I have seen that method recommended often. I'd like to keep things as segregated as possible but as simple as possible.
NA Beard - Good point on the personal/business .25/.75 split. Thanks for the input.
"what my unit would rent for in any GSI since it's what my income would be if my property were at full capacity."
That's called Proforma Income. Unless you declare it as such, the will take it as Actual and you could get tagged for Misrepresentation (aka Fraud)
As buy-n-hold, it just doesn't matter.
Tax wise is exactly the same. From my understanding of the way you described your business, you and the business are the same legally and tax wise. It is not even like taking the money out of one pocket and putting it in the other pocket. It is like taking it out of one pocket and putting in back in the very same pocket.
Putting your personal residence in an LLC causes you to miss out on the capital gains exclusion for owner occupied properties.
Get good tax and legal advice before you change how you title the property.
NA Beard - Much appreciated for the response. I think I'll stay out of the LLC for the time being and just continue forward without mucking up my finances with another couple of transactions that don't need to be there.
Great advice, everyone. Thank you!