Proper set-up for commercial building that is also primary res.

2 Replies

Hi folks, I'd appreciate any insight into this situation. We purchased a commercial building with a residential unit- an attached manager's quarters with separate entrance and locked door between the residential and commercial sections. We are planning to use the building primarily for short-term rentals, similar to a B&B, but may also have some retail space open to the public (like an art gallery). We are trying to wrap our heads around the best way to set everything up for tax purposes, liability, and just smart business planning. 

We set up an LLC in our state (Colorado) with federal EIN, and will set up separate bank and credit accounts for the LLC. It is owned by me and my husband with no other members.

Our accountant recommends NOT transferring ownership of the building into an LLC, which mirrors what I've read here since this is our primary residence. We anticipate that this will be our primary residence for 5-10 years. Following that, we may hire a manager and rent what is now our residence (or include it as part of the new manager's compensation).

We do not have a mortgage, so transfer to the LLC would be pretty easy if it turns out to be the right move. Our property insurance provider is fine adding the LLC name to the policy if we choose to do so.

The building needs a massive amount of work. We hope to have it partially operational by spring 2018 and fully operational by spring 2019. Since it is a commercial building and our residential section is very clearly and completely separate from the commercial space, I believe that even though the building is not operational our renovations to the commercial space will be business expenses. Any arguments that this would not be the case?

I'm thinking that our best option is to use the LLC to manage the property while we retain ownership personally. We will be very careful to keep commercial and residential use and accounting separate and keep a detailed paper trail of commercial renovations, contractors, building permits, etc, which will all be paid from the LLC's business accounts. We will be pumping cash into the LLC upfront to make this possible. (Should this be an interest-free loan from us to our LLC?) Short-term rentals will be managed by the LLC, payments will be made to the LLC. Any red flags here?

If we decide to move out of the building and hire a manager, assuming no plans to sell, would it make sense to transfer ownership to the LLC at that time? Or would you keep the structure of personal ownership/LLC management?

Anything else I should be considering?

Thanks in advance!

@Michelle Pattison I imagine you haven't gotten much response because there are so many complicated legal and accounting questions here. I would recommend getting a great local attorney and cpa to talk through these issues with.

But having said that... I think you're on the right track.

Buy it and finance it in your personal name. Sounds like you have the corporation already and it makes sense for them to rent the property from you and operate the business.

Just make sure to, as you said keep the accounting/bank account/interests separate and because your company is renting it from you be reasonable with things like market rent and terms.

The company should absolutely pay for the build-out of the space for commercial purposes. Ideally you put that money in to the company to buy your initial shares but you can structure additional equity or debt (loans) investments in the company either from you or other investors.

@Michelle Pattison I apologize for the delay in the reply. So my thought is, knowing the size of Paonia, you will need to cast your net wider to find a competent CPA or attorney. IMO the cost of using marginally competent local talent is far greater from the risk of error perspective than using someone far away who knows what they are doing. You might ask some commercial brokers if they have any suggestion. You can use the search feature on this website to find people as well. I wish you well in your endeavor. It sounds exciting.

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