LLC for Rental Unit within Primary Residence?

Question

Hi all.  First post, and looking forward to giving back to the community once I acquire more knowledge myself.

We rent out 25% of our primary residence to a long-term tenant.  I am wondering if it's 1) possible and 2) beneficial to put that rental into an LLC?  For one, it could allow me to have an I-401K plan?  Liability benefits?  Tax benefits?

Thanks in advance for your input!

John Mocker · Answer

Jon,

from an insurance standpoint, if you put the home into and LLC you need to have coverage in the name of the LLC.  That leaves you needing to get Liability, contents, loss of use, etc. in your name.  You may need to do a separate Renters policy in your name to cover your exposure.  That would probably mean an increase in your overall costs.

If you do keep the home in your name I would suggest looking at an Umbrella policy.  That type of coverage provides an additional limit of liability (normally in increments of $1,000,000) above your home, auto, boat, RV, etc. liability coverage.

Colleen F. · Answer

@Jon Rausch  I won't say you can't do it but I don't believe it would be beneficial.   As for a 401k you would need to have active income for a 401k and the real estate income that you describe is generally considered passive.

Jon Rausch · Answer

Thank you Andrea. You're probably right, that our mortgage would get complicated and we'd have to refi.  Possibly separating it out into two loans, one for the portion we live in, and one for the business portion. Insurance would get complicated too, and possibly expensive.  Hmmm.

Andrea Lane · Answer

Jon,

Since this is your primary residence I am not sure you will be able to get a loan in an LLC.  You can check with lenders and see if this is possible.