Personal tax benefits if property is under LLC?
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Lender · Catskills / Hudson Valley / Greater NYC Metro · Member since 2023 · 24 posts · 11 votes
3yHi @Dan N.,
This question comes up a lot with the clients I work with who are looking at owning properties for a mix of personal use and rental investment. A couple of key tax benefits many are familiar with are the mortgage interest deduction, the state and local property taxes deduction, and the capital gains exclusion on the sale of primary residences. These all apply to individuals who own homes primarily for owner occupied purposes. When you get into the rental investment property space, there is a whole new world of tax benefits that heavily favor real estate properties held as investments, such a depreciation and cost segregation studies, general deducibility of business expenses, and 1031 exchanges (relates to capital gains).
If you're not planning to own a home for rental investment purposes but own it in an LLC to, for example, accommodate a multi-owner vacation property, you may deduct interest paid on your home mortgage(s) if the mortgage amounts on your primary residence and secondary home are no greater than $750,000 (if married filed jointly) or $375,000 (if married filing separately or single). If your combined mortgage balances exceeds those thresholds, you may still be permitted to deduct the interest you paid on your home mortgage, but the amount of deductible interest will be phased out or limited.
To be eligible for the home mortgage interest deduction, you will have meet the following requirements: 1) you file an individual tax return on IRS Form 1040, or 1040-SR and you itemize your deductions on Schedule A; 2) you owned a home that is secured by the home as collateral for the mortgage or other secured debt (i.e. deed of trust), and 3) the home was your primary residence or a second home that you treated as your secondary home.
If you rent out the second homed (for more than 14 days), your mortgage interest is deductible just as a business expense just any other business expense is deductible. The deduction taken against any rental income you receive would be pro-rated based on the number of rental days vs. personal use days. The portion of mortgage interest not reported as a deduction against your rental income may still be taken as an itemized deduction on your Schedule A subject to mortgage limits referenced above.
You cannot take advantage of capital gains exclusion on the sale of a primary residence if you hold that property in an LLC, but there's no reason to hold a primary residence in an LLC anyways. LLCs are good for rental investment properties and multi-member vacation properties held for personal use.
Hope that helps!
8 Replies
- 3yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
LLC will not save you taxes for your rental investment.
INVESTOR FRIENDLY CPA®5241 Reviews - Lender · Catskills / Hudson Valley / Greater NYC Metro · Member since 2023 · 24 posts · 11 votes3y
Hi @Dan N.,
This question comes up a lot with the clients I work with who are looking at owning properties for a mix of personal use and rental investment. A couple of key tax benefits many are familiar with are the mortgage interest deduction, the state and local property taxes deduction, and the capital gains exclusion on the sale of primary residences. These all apply to individuals who own homes primarily for owner occupied purposes. When you get into the rental investment property space, there is a whole new world of tax benefits that heavily favor real estate properties held as investments, such a depreciation and cost segregation studies, general deducibility of business expenses, and 1031 exchanges (relates to capital gains).
If you're not planning to own a home for rental investment purposes but own it in an LLC to, for example, accommodate a multi-owner vacation property, you may deduct interest paid on your home mortgage(s) if the mortgage amounts on your primary residence and secondary home are no greater than $750,000 (if married filed jointly) or $375,000 (if married filing separately or single). If your combined mortgage balances exceeds those thresholds, you may still be permitted to deduct the interest you paid on your home mortgage, but the amount of deductible interest will be phased out or limited.
To be eligible for the home mortgage interest deduction, you will have meet the following requirements: 1) you file an individual tax return on IRS Form 1040, or 1040-SR and you itemize your deductions on Schedule A; 2) you owned a home that is secured by the home as collateral for the mortgage or other secured debt (i.e. deed of trust), and 3) the home was your primary residence or a second home that you treated as your secondary home.
If you rent out the second homed (for more than 14 days), your mortgage interest is deductible just as a business expense just any other business expense is deductible. The deduction taken against any rental income you receive would be pro-rated based on the number of rental days vs. personal use days. The portion of mortgage interest not reported as a deduction against your rental income may still be taken as an itemized deduction on your Schedule A subject to mortgage limits referenced above.
You cannot take advantage of capital gains exclusion on the sale of a primary residence if you hold that property in an LLC, but there's no reason to hold a primary residence in an LLC anyways. LLCs are good for rental investment properties and multi-member vacation properties held for personal use.
Hope that helps!
- 3yDan N.Member since 2019 · 119 posts · 60 votesOP
Quote from @Clark Peterson:
Hi @Dan N.,
This question comes up a lot with the clients I work with who are looking at owning properties for a mix of personal use and rental investment. A couple of key tax benefits many are familiar with are the mortgage interest deduction, the state and local property taxes deduction, and the capital gains exclusion on the sale of primary residences. These all apply to individuals who own homes primarily for owner occupied purposes. When you get into the rental investment property space, there is a whole new world of tax benefits that heavily favor real estate properties held as investments, such a depreciation and cost segregation studies, general deducibility of business expenses, and 1031 exchanges (relates to capital gains).
If you're not planning to own a home for rental investment purposes but own it in an LLC to, for example, accommodate a multi-owner vacation property, you may deduct interest paid on your home mortgage(s) if the mortgage amounts on your primary residence and secondary home are no greater than $750,000 (if married filed jointly) or $375,000 (if married filing separately or single). If your combined mortgage balances exceeds those thresholds, you may still be permitted to deduct the interest you paid on your home mortgage, but the amount of deductible interest will be phased out or limited.
To be eligible for the home mortgage interest deduction, you will have meet the following requirements: 1) you file an individual tax return on IRS Form 1040, or 1040-SR and you itemize your deductions on Schedule A; 2) you owned a home that is secured by the home as collateral for the mortgage or other secured debt (i.e. deed of trust), and 3) the home was your primary residence or a second home that you treated as your secondary home.
If you rent out the second homed (for more than 14 days), your mortgage interest is deductible just as a business expense just any other business expense is deductible. The deduction taken against any rental income you receive would be pro-rated based on the number of rental days vs. personal use days. The portion of mortgage interest not reported as a deduction against your rental income may still be taken as an itemized deduction on your Schedule A subject to mortgage limits referenced above.
You cannot take advantage of capital gains exclusion on the sale of a primary residence if you hold that property in an LLC, but there's no reason to hold a primary residence in an LLC anyways. LLCs are good for rental investment properties and multi-member vacation properties held for personal use.
Hope that helps!
@Clark Peterson thanks for this detailed answer.
Indeed I forgot to mention that this is an investment property. - Lender · Catskills / Hudson Valley / Greater NYC Metro · Member since 2023 · 24 posts · 11 votes3y
No problem! Then the answer is pretty simple: no, you don't get to take the personal income tax benefits associated with homeownership. But you get to take advantage of a much richer and greater variety of tax benefits for your rental investment property. The LLC will not enable you to take advantage of any incremental tax benefits beyond those, but it is likely the right legal structure for a rental investment for purposes of limited liability, asset protection, flexibility, and governance.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes3y
@Dan N. The llc does not affect your taxes from a rental property in any way.
- 3yJoseph PalmieroBusiness MemberCPA · PA · Member since 2023 · 151 posts · 115 votes
The IRS treats a single member LLCs as a disregarded entities. The income and expenses from the investment property will be reported on your personal return.
- 3yDan N.Member since 2019 · 119 posts · 60 votesOP
@Joseph Palmiero oh really? Interesting. Thank you
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