LLC holding primary residence?

Question

I recently started a wholly owned LLC to perform fix and flips initially, with the idea of transitioning to buy and hold as the cash reserves allow.  Is there any tax incentive, or disincentive, to transferring my primary residence to the LLC and renting it from the LLC?  Or is it a wash since LLC income is passed through to the owner(s).

Duncan Taylor · Answer

Very bad idea. If you put your home in the LLC you lose your homestead exemption and you could be forced to pay a %age of the rents as business license taxes. You could also be forced to then treat part of the rent you pay to the LLC as wages triggering additional FICA taxes. At the very least you will have to pay income taxes on at least part of the rent you are paying to the LLC which means you will pay taxes on those dollars twice.

I hold my residences in a family limited partnership. It was setup by my estate planning attorney and it provides rock solid protection of the assets while preserving ALL of the tax advantages.

I know the gurus make LLCs look sexy and tout them as the must have accessory of all hip real estate investors, but they don't really provide the kind of protection the gurus claim.

I urge you to seek competent counsel.

Bill Gulley · Answer

Bad idea, no tax advantage and you can lose advantages of your owner occupied home and homestead exemptions. You also defeat the purpose of any liability protection making your home a company asset. See your tax advisor, but there is no advantage, just down sides. :)

Kerry Drake · Answer

Thanks to all for the responses.  You've brought up some things I wasn't even thinking of.

Steven Hamilton, you say "NEVER ever hold real estate long term in any type of corporation."  What is your recommendation for holding rental property?

Steven Hamilton II · Answer

Sounds to me like everyone has a bit of input here.  I'd recommend that you sit down and talk with someone.

I'm a fan of C-corps if used correctly. S-corps also have their place. There is not catchall for everything.

NEVER ever hold real estate long term in any type of corporation.  There are very very limited exceptions to this.

Never put your residence into anything other than a trust or family limited partnership.

Steven Hamilton II · Answer

I mean ANY type of Corp. A S-corp can lose it's benefits very quickly if the S-election is terminated.

"Thanks to all for the responses. You've brought up some things I wasn't even thinking of.

Steven Hamilton, you say "NEVER ever hold real estate long term in any type of corporation." What is your recommendation for holding rental property?"

@Kerry Drake ,

I recommend holding it personally, trust or in an LLC if it is low cost in your area.

Single member LLCs are called disregarded entities. That means you simple include their income on Schedule E.

In Alaska it is $250 for the initial LLC filing fee plus the Biennial report is $100.

Either way I recommend a good quality Umbrella policy.

Steve Porter · Answer

Daren Wang.... check with your accountant.  An LLC may be able to elect to file as an S corp (2553 form) and eliminate Self-Employment tax.  But again, check with accountant.

Jerry W. · Answer

@Kerry Drake I am also saying its a bad idea to put your personal residence into your LLC.  Pick one of your nicer rehabs, live in it while you fix it up, stay there as your primary home for 2 out of the last 5 years, they if you sell it there are no capital gain taxes.  Your house will already be staged, your mortgage interest is still deductible as will your taxes if you go long form, and you get a great house to live in, if of course you do a good job on rehabbing.  Hope this helps.

Dean Suzuki · Answer

Hi

My attorney recommended against it since he mentioned that I would lose the capital gain tax exemption (up to 500K for married couples, I believe) if I sold my house in the future and had a gain.  You can take the deduction if you live in a house two out of the last five years.

Also, you lose the asset protection barrier between your house and your business assets in the LLC if your house is in your LLC.

However, I would check with your attorney since your situation maybe different than mine.

Thanks,

Dean

Account Closed · Answer

There was a question raised on here by someone else regarding whether or not this was even a legal transaction (renting to self), based on IRS current definition of rent expense. So before trying to analyze tax incentive, may have to look into legality of the transaction to start with.

Carolyn W. · Answer

I'd like to sell my house as owner finance to my tenant but he is in the middle of a divorce.  What options are there?

LLC holding primary residence?

Most Popular Reply