LLC Rent back to member - Is this legit?

2 Replies

I am in a partnership with my father and brother in a parent LLC that then has property LLC's under it. My father is down sizing and is in the process of buying a new home as his place of residence. Although we only have duplexes at this time in our LLC, is there any benefit to putting his new home in the LLC and have a rental agreement with my father?

On the surface, I feel like this is dodgy, but I cannot find any legal reason not to do this.  Would the mortgage of the new property need to be from another member or is it okay that he is also the mortgagee?  I feel like there is circular logic going on here, so help from the BP community is appreciated.  Before you all tell me to talk to a lawyer, if this is not flawed on the surface or illegal, I intend to do that next.

Some of the reasons why we are thinking about this is that my father is elderly, but still in good health.  That said, the 30 year mortgage will probably out live him.  And if he gets to the point where he will need to go somewhere for living assistance, we want the ability to rent out the house without any issues.  

His rent would only be the cost of PITI, so this would not be generating income, yet it would provide additional write offs. What am I missing??

@Bryan Petrinec

You lost me on your reasons to try this. Nothing stops your father from renting out his house if he goes into a facility, there's no need to run it thru an LLC. If you're thinking about Medicaid eligibility, then him being a partner in the LCC is already a problem.

If there are valid reasons to go this route, then you have another issue. An LLC should own business/investment property. It's OK to rent it to a family member, including an LLC partner, as long as it is rented at the current market value - as opposed to PITI. If PITI is less than the fair market rent value - then it is a non-deductible personal property, opening a large can of worms.

Finally, if it is to be an LLC property, you will be a part-owner, with various implications for estate planning and family dynamics.

I can think of some other issues, too.

@Michael Plaks , I appreciate the input. The goal into looking into this was to see if there were any advantages to my father renting this house back through the LLC vs. owning it as his personal property. At this stage, he is more focused on deductions than income.

As for the existing LLC, he is represented by his trust in the LLC. My bother and I put in the sweat equity in finding, managing, and interface with the tenants, while my father brings the financial backing for this venture. There is an operating agreement in place, and everything is going well on the family dynamics side of things.

On the future rental of this property, my question is based on the ease of renting the property. If my father goes to a facility and has issues, his POA will kick in. Will it be easier for the LLC to rent/manage the property or through the POA, or is there just really no difference.

We are just trying to explore our options as my father downsizes.  It sounds like as long as the rent is market value, there is noting "shady" in this approach.  Now we just need to discuss with our CPA the benefits vs outright ownership.  

Thanks again.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here