Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
Has anyone ever sold their primary residence to their LLC and then rented their home back from their LLC? I was thinking this could have some fantastic tax savings by expensing home maintenance/utilities/insurance, etc through the LLC for a tax write off.
The question for your accountant is not to ask, "Is this legal?" The question is more, "How can this be done so it's legal? Do some out of the box thinking."
Commercial Real Estate Broker · Memphis, TN · Member since 2008 · 71 posts · 11 votes
18y
It is going to really depend on your state's property tax laws and the appreciation in value of your home.
If your state has a homestead exemption on property tax, then your llc is not going to qualify for homestead exemption. So your property tax bill will be higher.
You will not qualify for Section 121 Capital Gains Exclusion on your primary residence if your LLC owns the house. You will have to depreciate the house over 23.5 years, but this amount will be recaptured at 25% when you sell. You can do a 1031 exchange, but pay the extra fees, while it would have been tax free for nothing in your own name.
Your property insurance will most likely be higher as you have to pay for a landlord policy owned by the llc and a renters policy in your name.
The yearly fees and taxes on the llc will add up depending upon the state that you are located. The additional paperwork and forms will add up. Depending on where you live, the local jurisdiction may require your llc to have a business license and pay more taxes.
Unless your house is free and clear, it would violated Due on Sale clause. Yes not likely to be invoked now, but it is a possibility.
Asset protection this will be neutral unless the LLC has another member besides you.
I don't see how you would deduct utilities unless they were provided in the rent. The IRS will want to make sure this is a true market rent if they figure out you are renting to yourself.
In summary, I don't think the tax savings in deductions would outweigh what I have listed unless you think your market will not appreciate. If you think that, then you are better off just renting from someone else anyway.
Real Estate Investor · San Francisco, CA · Member since 2008 · 51 posts · 0 votes
18y
What exactly is your goal? Is the tax write off what you're after? Why not just rent space to your LLC as an office? This way you have income coming in from rents paid by your LLC to you. You can then deduct the expenses (% of usage) through your LLC. Kitchen (break room), hallways (common areas), etc.
It would be different if the property was owned by your business and do a sales-leaseback to generate capital.
Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
18y
My goal was to legally expense the expenses of my primary residence. I calculated my primary just like I calculate a rental so I know how much it's costing me out of pocket per month and last week I was thinking that it would be nice if I could set it up so that the house is owned by a company and I rent from the company so all the expenses related to owing the home are tax deductible except for the renters insurance I would carry for the contents.
I also thought it might improve asset protection a bit.
Some friends are computer contractors who started their own (1 employee/1 owner) contracting companies. They setup their companies to provide cars to all of their employees. My understanding is that is legal if your INC company has HR benefits that are available to all employees. Of course your company would only have one or two (spouse or adult child) employees.
If they did it with their cars, why can't your company provide a housing allowance to all employees to "offset local living expenses".
The question for your accountant is not to ask, "Is this legal?" The question is more, "How can this be done so it's legal? Do some out of the box thinking."
Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
18y
Originally posted by "dafly":
My goal was to legally expense the expenses of my primary residence.
The tradeoff is that you are giving up your capital gains exclusion on a primary residence when you sell. If you wind up with a large gain you may regret using this tactic.
Banker · Pleasanton, CA · Member since 2008 · 22 posts · 2 votes
18y
Just when you're ready to put it on the market, buy the home from the LLC. That way, you would be selling your primary residence and can take the tax exclusion.
Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
18y
Originally posted by "TheBank":
Just when you're ready to put it on the market, buy the home from the LLC. That way, you would be selling your primary residence and can take the tax exclusion.
Best of both worlds.
One problem with that the house must have been your primary residence for 2 of the last 5 years. You will also have recapture on any depreciation that you claimed. If the IRS initiates an audit and found that the transfer was done to avoid taxes in a fraudulent manner you are in for a world of trouble.
Banker · Pleasanton, CA · Member since 2008 · 22 posts · 2 votes
18y
Totally agree, Richard. The moment we try to work around the legal system for tax or otherwise, we're open to slightly unethical processes and accept the risk/reward ratio.
Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
18y
There's nothing illegal about it it's just that you have to weigh the pros and the cons, and Richard pointed out a con that for me out weighs the pros.
Moving a house into an LLC isn't that hard, moving it out however is a little different and what you are talking about would be borderline illegal. It's also not the brightest move in the book because an 1031 would do it legally.