I own a duplex in California in which I live in the top unit and rent the bottom unit to a tenant. The property is valued at about $1,000,000. The property tax is about $15,000 annually. To date, I have attributed half of the property tax ($7,500) to the rental unit and deducted these as business expenses on Schedule E; I have deducted the remaining property tax ($7,500) on my Schedule A personal deductions. With the new tax law, state and local taxes, including property tax, are capped at $10,000. In 2018, all of this will be taken up by my state taxes. This means I won’t be able to deduct $7,500 of the property tax (half) on Schedule A that I have in the past.
My idea is to create an LLC that covers the entire duplex, and both myself and the bottom unit tenants will pay rent to the LLC. Income from the LLC would pass-through to my personal income. I believe this would allow me to deduct my entire property tax ($15,000) on Schedule E. However, my mortgage lender will not allow me to transfer my deed to an LLC.
Question 1 – Could I still create an LLC that collects rent and deducts expenses (like my property taxes) on Schedule E even if the my deed is held by me personally and not held by the LLC?
Question 2 – Would it be dishonest to "pay rent" for my unit to the LLC in the exact amount that would make the LLC's net profits = $0, therefore avoiding paying any income tax on my rental property?
Question 3 – If I formed the LLC at some point this year, could make deductions for all of 2018 or would this all start only at the date by which the LLC is established?
It generally is not a good idea to put your personal residence in an entity. You'll want to be able to use the 121 exclusion of capital gain upon sale I presume, right? 1. The deduction of your property taxes is tied to ownership. If your LLC does not own the property for which the property taxes are due, it cannot deduct the expenses. You can create an LLC to collect rents which basically acts as a management company but that will just have the effect of reporting the rents on Schedule E, same as before. 2. Yes, that would be dishonest and borderline criminal tax evasion. 3. You can only take deductions in the LLC from the point in time in which the LLC pays the expenses and is formed. If it smells fishy, it probably is fishy. The IRS is NOT something you want to mess with. Kudos for thinking creatively, but time to bite the big one and join the rest of Californians taking a hit on the $10k cap on state and property taxes. Might want to ensure you increased your withholding/estimated payments accordingly to avoid underpayment penalties. Try increasing your charitable deductions or pay more mortgage interest if you want to keep your itemized deductions at a similar rate to prior years.
*This information is not to be relied upon. It does not create an attorney-client nor a CPA-client relationship. Readers are advised to seek professional advice.