How can I sell my primary home to my LLC legally? (moving)

Question

I bought my first house in 2015 for 91k and moved right in. It was bank-owned and I bought it cash. It is now worth about 250k. I'd like to move to a different town and rent out that first house (both in Oregon). I'm thinking to start 2 LLCs, one just to hold the property, and the other as my rental business. My idea is to sell my house to the LLC biz (which I realize is a sole-proprietorship to the IRS), and take advantage of the Home Sale Exemption for those capital gains. Then, with the LLC having purchased at fair market value (250k) such that the annual depreciation deduction is much higher than it would be at my personal cost basis of 91k. Is this all legal?

Or does the LLC rental biz have to be a partnership?

Do I even need a second LLC beyond the one for holding the property since the IRS views it as a sole proprietorship anyway?

Any warnings? Something I'm missing?

Or does the LLC rental biz have to be a partnership?

Do I even need a second LLC beyond the one for holding the property since the IRS views it as a sole proprietorship anyway?

Any warnings? Something I'm missing?

Natalie Kolodij · Answer

You can't sell your self your own house.

You are the same as your LLC to the IRS- there's no where and no one to report a sale to or from.

This CAN potentialyl be done with a corporation but comes with several other considerations so talk to a tax professional before considering this.

Account Closed · Answer

@Daniel Trost

Why not contribute the property to the LLC. Easier and cheaper. Given that it is a related party I do not see any benefit going through the motions of the sale. Also the above is assuming there is no debt or liens on the property.

Mike S. · Answer

@Daniel Trost

My understanding is that you can only get the 121 exclusion if you sell your property to another person. A disregarded entity is not a different person. However you can sell it for fair market value to a corporation.

https://andersonadvisors.com/121-exclusion-depreciation-tips/

Basit Siddiqi · Answer

@Daniel TrostI would personally consider selling the property to take advantage of the section 121 exclusion.

Doug Wilson · Answer

As @Natalie Kolodij stated as eloquently as possible, you can’t sell your house to your own LLC.

You own it free and clear. If you want to keep it as a rental just transfer the title to an ownership LLC. Now your LLC owns a house worth 250k. If you need access to capital, you have equity and collateral available. You can start a second LLC to manage it and any future properties as you build up your portfolio.

This 2x LLC structure with some umbrella insurance is quite common and gives most people all the legal protection you would need as a real estate investor.

Wealth is not successfully built through depreciation schedules. They are a tax savings mechanism, pure and simple. You’re attempting to shuffle the deck to wipe out some cap gains, own a rental, and have some money in the bank that you can potentially invest elsewhere. What I described above is a much more advisable way to put yourself in the same position - no cap gains, access to capital, and liability protection.

Hope that helps.

Doug

Steve Morris · Answer

From what it sounds like, it's not an arms-length transaction. I'd ask your CPA/atty, but if you used it to exempt income, you'd probably lose with the IRS and your state.

Daniel Trost · Answer

@Matt Hoyos

What trouble or cost to sell to myself? I don't need an agent. I might get a proper evaluation for records but that's about it. There are no debts or liens, I own it free and clear. The advantages would be both savings in taxes on the capital gains, and a greater deductible year after year that would decrease my taxes on the rental income.

How can I sell my primary home to my LLC legally? (moving)

How can I sell my primary home to my LLC legally? (moving)

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