Open a business bank account?

Question

Hello fellow investors!

Three days ago I closed on a duplex - one unit has two years left on a lease and I will be living in the other unit (house hacking).

I have two questions:

1) Should I open an LLC, even if I'm just renting out a single unit?

2) Should I open a business bank account for all rent and expenses? (If so, any suggestions on a good bank to go through?)

Thanks in advance!

Dave Foster · Answer

@Joeyanna Colton, @Emily Pierce.  Whether you lose the homestead exemption (property tax discount) because you put it in an LLC is probably going to be a state by state issue. But you will lose the 121 primary residence exemption no matter what entity it is filed in, for the half you don't live in.

The good news is that the half you don't live in becomes an investment property with all of the tax incentives.  And when you sell the property you will get to take both the primary residence exemption for the half you live in (as long as you've lived in it for 2 out of the 5 previous years).  And you will get to 1031 the half that you rented so you will pay no tax at all.

Jessica Tomlinson · Answer

I'd consult your attorney... BUT it's not necessary to form an LLC. Since you're owner occupying, it's probably less of a priority. We househack as well and just opened a separate checking account for house income and expenses exclusively. It doesn't have to be a business bank account if you go that way.

Emily Pierce · Answer

Hi Ryan, something to think about with the LLC is that you'll likely lose your homestead tax credit if you'll be living in one unit. Also, I believe you'll also lose your capital gains tax exemption if you want to sell.

The terms of your mortgage contract may not allow you to convert to an LLC anyway and the mortgage could be called due.

I personally would not put my personal residence into an LLC. Just a few things to consider.

Joeyanna Colton · Answer

Hi Emily - Just reviving this post as I'm curious. Would he lose the capital gains tax exemption if he were to rollover the sale through a 1031 exchange? Thanks :)

Open a business bank account?

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