Primary Residence Turned Rental - Any Tax Savings Available Now?

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Primary Residence Turned Rental - Any Tax Savings Available Now?

Lucas Carroll
Homeowner · Conroe, TX · Member since 2016 · 21 posts · 9 votes

Good afternoon all! Long time lurker, first time poster, glad to be here. 

I was house hacking my primary residence in Conroe, Texas but I am going to turn it into a full blown rental as I'm away from home for work regardless. As they say, you need to have your own business to write things off in order to pay less in taxes. However, this will only be one property and I'm going to lose my homestead exemption status. 

Is one rental property enough to create an LLC and start writing things off? Everyone speaks of writing off depreciation and such to save massive amounts in taxes. At what point do you really start to capitalize on that? 

Also - if anyone has any recommended podcasts/learning resources for this type of topic, I'm all ears. 

Thanks BP!

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Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
5y

Hi @Lucas Carroll. Great first question. I've actually done three househacks myself and just met with my accountant today to get ready for filing 2021 taxes. We talked about a lot of what your question asks. 

First of all, an LLC offers no tax advantage (according to my CPA). It just passes through to your personal income taxes.


Other things to consider with your taxes though. 

1. Use an accountant to file your taxes. They are worth every penny.

2. While I lived in my house hacks I was able to depreciate the percentage of the square feet of the home that was occupied by my tenants. This was while I lived there. Once I moved out (to the next house hack) I was able to start depreciating the full value. In addition to depreciating that percentage you can also deduct expenses that are for the whole house at that same percentage while you live there. E.g. repairs, supplies, etc. 

3. Make sure you talk to your accountant about Qualified Business Income Deduction (QBID). It basically allows for your first 20% of rental income to be tax free. 

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  • Lauren CutchenBusiness Member
    Real Estate Agent · The Woodlands, TX · Member since 2019 · 238 posts · 89 votes
    5y

    Hey! Congrats on taking the next step! 

    Generally, it's fine to keep a single rental property in your name. Yes, you'll lose homestead exemption for tax year 2022. You'll still keep the tax benefit when filing your taxes. In my experience, it costs like $200 to form an LLC, and then it was around $400 to file taxes under an LLC with a CPA, not to mention the fees they'll charge filing your personal returns. I didn't find it to be worth it. Also, be aware that a lender has your name, not the LLCs name. I've heard folks say there is a "due upon sale" clause if you switch ownership from you to your LLC. For one home, I don't think it's worth doing an LLC - in my opinion. Just keep up your rent rolls, expenses, and keep a detailed file. Also, talk with a CPA and see what they have to say. There's always a benefit for another "level of protection," but at this point, in my opinion, you'll be fine without one.

    Good luck! 

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Lucas Carroll As mentioned, you can still use all of the same deductions leaving it in your personal name…..there is No tax advantage whatsoever in transferring the property to an llc. 

    1Reply
  • Bradley Dosch
    Real Estate Agent · Seattle, WA · Member since 2019 · 301 posts · 188 votes
    5y

    I just have my couple house hacks in my own name and claim the deductions that way. I don't really see a point in using an LLC yet. I like the Fi Team podcast by @Craig Curelop

    1Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    5y

    There's no tax benefit of an LLC. And a SMLLC doesn't mess up your 121 exclusion either so if you occupy it for 2 years and then fully rent it for 3 you can still potentially sell it tax free.

    You need to report the rental activity of the house -hack  right now. You get to depreciate fully rental use spaces, and deudct a pro-rata of all expenses. 

    Once you move out those readjust. 

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  • Lucas Carroll
    OP
    Homeowner · Conroe, TX · Member since 2016 · 21 posts · 9 votes
    5y

    @Lauren Cutchen - being from the area, do you know any Conroe-native, investor-friendly CPA's? 

    0Reply
  • Lucas Carroll
    OP
    Homeowner · Conroe, TX · Member since 2016 · 21 posts · 9 votes
    5y

    @Bradley Dosch Thanks for responding. Do you handle your own taxes or go through a CPA? If you do it yourself, where did you pick up on all the different types of deductions? 

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    @Lucas Carroll if you were house hacking, then you already have a rental business. You are required to claim income on your taxes and you should already been claiming depreciation. An LLC is not required and gives you no added benefit on taxes. Without an LLC, you are just a sole proprietor which is still a business. The only shift that happens when you no longer live there is the entire house can now be depreciated. Have a CPA setup your depreciation.

    1Reply
  • Lucas Carroll
    OP
    Homeowner · Conroe, TX · Member since 2016 · 21 posts · 9 votes
    5y

    @Joe Splitrock Yeah, I wasn't depreciating any of the property whether shared or not nor anything else for that matter. I just assumed you had to be a big wig and not merely a house hacker to get any tax benefit. I had no idea. Thanks for the input. I'll definitely have to find me a CPA. 

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Lucas Carroll:

    @Joe Splitrock Yeah, I wasn't depreciating any of the property whether shared or not nor anything else for that matter. I just assumed you had to be a big wig and not merely a house hacker to get any tax benefit. I had no idea. Thanks for the input. I'll definitely have to find me a CPA. 

     Your CPA may want to file amended returns. You are legally required to reclaim depreciation when you sell. That means whether you realize the tax benefit or not, you will pay later. You definitely want to fix that.

    1Reply
  • Lucas Carroll
    OP
    Homeowner · Conroe, TX · Member since 2016 · 21 posts · 9 votes
    5y

    @Joe Splitrock Thanks again, Joe. I'll definitely have a sit down with someone in regards to the past mishandling on my part. In a similar vein - do you personally use a bookkeeping software or do you do it within your financial institution's capabilities to help ease tax time? 

    0Reply
  • Bradley Dosch
    Real Estate Agent · Seattle, WA · Member since 2019 · 301 posts · 188 votes
    5y

    @Lucas Carroll I used a CPA for the first time for the year of 2020 and plan on doing so again for 2021

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Lucas Carroll:

    @Joe Splitrock Thanks again, Joe. I'll definitely have a sit down with someone in regards to the past mishandling on my part. In a similar vein - do you personally use a bookkeeping software or do you do it within your financial institution's capabilities to help ease tax time? 

     For bookkeeping, we just use a spreadsheet to track expenses and we save all the receipts. On the spreadsheet we track amount and purpose of expense. We also code them according to tax category, so it is easy for our CPA to do our takes. My CPA told me we are very organized. He has some clients that just give him a box of receipts with notes written on the back. They can work with either situation, but expect more billable hours if you are less organized. Part of the discussion with your CPA is asking them how they want you to track things to make it easier for them. The important thing is save all receipts, even if you are unsure if it is a legitimate expense. Let your CPA decide if yo are in question.

    0Reply
  • Ryan ThomsonBusiness Member
    Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
    5y

    Hi @Lucas Carroll. Great first question. I've actually done three househacks myself and just met with my accountant today to get ready for filing 2021 taxes. We talked about a lot of what your question asks. 

    First of all, an LLC offers no tax advantage (according to my CPA). It just passes through to your personal income taxes.


    Other things to consider with your taxes though. 

    1. Use an accountant to file your taxes. They are worth every penny.

    2. While I lived in my house hacks I was able to depreciate the percentage of the square feet of the home that was occupied by my tenants. This was while I lived there. Once I moved out (to the next house hack) I was able to start depreciating the full value. In addition to depreciating that percentage you can also deduct expenses that are for the whole house at that same percentage while you live there. E.g. repairs, supplies, etc. 

    3. Make sure you talk to your accountant about Qualified Business Income Deduction (QBID). It basically allows for your first 20% of rental income to be tax free. 

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  • Lucas Carroll
    OP
    Homeowner · Conroe, TX · Member since 2016 · 21 posts · 9 votes
    4y

    @Ryan Thomson Thank you Ryan! Clever real estate team name, by the way. The QBID is totally new to me so it does sound like I just need to pony up and hire a professional given the sheer amount of new info people have provided. I appreciate you taking the time to respond. 

    I'm moving in with my girlfriend who is also house hacking her house, so I think I found me a good one. Thanks again, Ryan!

    0Reply
  • Ryan ThomsonBusiness Member
    Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
    4y

    @Lucas Carroll thanks man! I can't take credit for the name though. Craig Curelop (the house hacking guy) came up with it. I just switched to his team. 

    Having a girlfriend on board AND doing her own, is HUGE!

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 4k+ votes
    4y

    @Lucas Carroll

    You can start depreciating and taking deductions when you have 1 rental property.

    You don't need an LLC to take advantage of deductions / depreciation.

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