Living in Remodel during remodel

7 Replies

My wife and I have purchased a home that we intend to live in while our new construction is being built. I have purchased the home in the name of my LLC and will be living in the home while it is being remodeled.

What I am thinking about doing is putting everything in the name of my LLC (water, trash, elec, cable, etc) and implementing a lease agreement between myself and the LLC that lays out everything(including landlord being responsible for named utilities). The goal of this being to write off all these expenses come taxes next year.

Any thoughts to this? Ways I may be able to implement the plan better? How much should I charge myself in rent? Does it need to be market  or can I put a nominal number in there like $1?

I know this isnt rocket science what we are doing here, but its new to me and I would like to hear opinions of others. 

Thanks, 

Stephen

I am assuming you will live in it and then turn it into a rental and never sell it as a personal residence. Because definitely don't rent it if you intend to sell as a personal residence because you will start depreciation on the property for no reason.

Passive losses to yourself, for example,  when you write off expenses and charge yourself nominal rent  aren't deductible except against passive income. This is even further restricted by the IRS when you rent to yourself.   You should consult your CPA but it usually doesn't make any sense to do this. 

I plan to remodel and then sell once our new construction is complete. Why does it matter if I start depreciation? I am going to own it for about 6 months(hopefully) before selling. 

You depreciate the value of the house and so the gain from the sale on which you will be taxed will be the depreciated value vs sale price. For 6 months of living there even if you  were to be able to write your expenses against the (already taxed) money you fictionally pay as rent to yourself you will need to pay taxes on any difference between the "rent" and "expenses". I would talk to a CPA, even if you can do this, I don't see a win here.   

@Stephen D.

No, it is not rocket science, I agree, but neither is it play-doh.

From what I understand, you're having your future permanent residence, House A, built from scratch. Meanwhile, you bought another house, House B, as a short-term (~6 mths) flip project. You decided to temporarily live in this House B while you're remodeling it, with an intention to sell it for profit. Then move into House A once it is built.

If my understanding of your plan is correct, this is not a black-and-white situation. It can be interpreted more than one way for tax purposes. Either way, there probably should not be any depreciation or a self-lease involved. You won't be able to deduct all of your expenses, for sure, because some of them are personal expenses in nature, most obviously utilities. Where and how to draw the line between personal and business here is an interesting problem to solve. I see multiple possible interpretations/solutions but I am not able to produce a white paper here. It's a long conversation, sorry.