2-out-of-5 year rule negated by LLC?

Question

We’ve lived in our condo for the past 3 years and are considering renting it for the next 2-3 years then selling it to take advantage of the 2-out-of-5 rule. Since we’ll be renting it we want to put it in an LLC but are concerned that may prevent us from taking advantage of this 2-out-of-5 year rule?I’ve already check with my cpa and they said this is fine, but I wanted to post here to get a gut check (I’m very new to all this).

Other context:

We want to rent it for at least the next year because there’s a massive construction project taking place for the next “6 months” (likely longer). So We are thinking the construction will make it hard to sell.

We already have approval from HOA to rent.

TIA

Ashish Acharya · Answer

SMLLC will not negate the benefits.

John Mocker · Answer

Brian,

Two things to remember:

1. if you move out, you need to check with your agent to see if the insurance policy has to be rewritten to a new policy (with most companies it would be yes).

2. If you put the title of the condo into an LLC you need the insurance policy to have the LLC as the named insured.

If you are worried about Liability, an umbrella policy may be a less expensive alternative to give more coverage.  the policy provides additional Liability coverage if the underlying Auto, Home, or rented dwelling/condo has their limits exhausted in a claim. The Umbrella policy is generally sold in increments of $1,000,000 of coverage.

David M. · Answer

@Brian M.

I'm on the camp of the LLC is overblown --- you can many threads in bp about llc's...

The legal entity provides no tax/accounting benefits unless you are investing with a nonspousal partner.  Most people would seem to pierce their own corporate veil (consult a qualified professional or two) by not operating the LLC cleanly --- and because your CPA said it was okay doesn't count since this is a legal matter.  Sounds you are leaving the loan in your name...  hmmmm....  You should get the loan into the LLC's name which requires getting commercial financing since legal entities are not eligible for residential conforming loans.  After all of this, what are you saving?  Its a decision you have to make, but what tenant is really going to afford to sue you?

Back to your op, you used the plural first person so I am guessing you may not be doing a single member LLC...  Especially if you do a multimember LLC you''' have to pay for another Title search and Title insurance (double check if any issue with your policy if you move to single member LLC).  How long do you plan to be landlords?  Don't forget, the sec121 exemption is prorated against the time the property is used for business --- even if you could still use it.  Since you started your ownership by living there, you could move back into and sell to sec121 the whole thing nowadays.  You basically reset the clock.  You also have depreciation unrecapture --- you have to pay back the depreciation deductions ~25% to the IRS.

Oh, and don't forget a multi-member LLC files a partnership return.  Just another cost since you cpa no gets to charge you for filing another return AND the cost to filing the SchE in your personal return.

Bill B. · Answer

What’s the point of the LLC for one rental condo? It’s unlikely you’d get sued for any deferred maintenance, anything that you were personally responsible for the LC wouldn’t help. Especially if your expected rental time is 1 year and more than 3 means disaster has struck and you’ve made a mistake. There going to be virtually no privacy gain with a non-sale transfer especially if you have the mortgage/property taxes mailed to your new home.

2-out-of-5 year rule negated by LLC?

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