Primary residence to LLC (and yes I did a search :) Florida

Tax, SDIRAs & Cost Segregation
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Primary residence to LLC (and yes I did a search :) Florida

Christian Weber
Member since 2021 · 66 posts · 15 votes

So I am not the smartest person and some of the helpful replies in previous posts was above my mental capacity.

My situation

I own a home (homesteaded in FL) and have 2 roommates which help pay the bills.

numbers - 

mortgage left 155k, 

home value 330k, 

current interest rate 4.125% on conventional with 24 yrs left on a 30 yr

monthly payment with HOA $1600 pcm

I am wanting to either

1) turn this primary residence into an LLC and purchase another property to move into and start the process again with the aim being to rent my current house out on an annual 12 month lease for at least 2 - 3 years as I was told that as long as I lived in it 2 out of 5 years I can then sell without paying capital gains (though this confused me and anyone wanting to teach this to me like im 5 years old would be greatly appreciated). Reason for the LLC is I have 180k of equity in this home, additional 150k in retirement savings and another 60-80k in cash in my bank account and I want to make sure im protected if I rent it out and the renters sue me (im told that is a thing) - the nw home would become my new homestead

2) Put a heloc on the home (im told I should be able to get about 100k on top of about 60-80k cash I have), keep it as my primary and use the money as a downpayment for flips and either payoff upon completion or put a tenant in and refinance out

3) Refinance out 90-100k from my current home, mortgage payment would go up $300 per month ($3600 a year) and just use that money for flips/buy and holds or even just stick in the S&P at an average of 7-8% return so I am making 3-4% more on my money then it being in the house

I am super new to all of this, have been saving my pennies up for awhile and need to get going. 

Also will be working remotely so going to look towards Tennessee as a place to purchase as their is no state tax

Advice welcome especially in teach me like im 5 years old format

Thank you

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    The IRS section 121 allows you to move out and rent your house for Up To 3 years, After you have lived in it for at least 2 years (hence the “2 out of the last 5 years) and be exempt from any capital gains tax.  Be careful, since this is only for a Person and their primary residence, transferring to an llc may void this.  I think it is allowed but Definitely ask a cpa about it.

    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    5y

    I currently have properties held in LLCs. Financing is a different situation when you have entities involved, meaning that commercial loans need to be used rather than what you have already experienced with a conventional, FHA, VA or other "regular" mortgage. Yes, there are protections with the entity, but there are also protections while your house is currently insured and encumbered.

    Takeaway thought: if you have your current house fully encumbered (refinance or use the current mortgage + HELOC) what can be taken from you in a lawsuit? What about your liability insurance?

    0Reply
  • Christian Weber
    OP
    Member since 2021 · 66 posts · 15 votes
    5y
    Originally posted by @Kerry Baird:

    I currently have properties held in LLCs. Financing is a different situation when you have entities involved, meaning that commercial loans need to be used rather than what you have already experienced with a conventional, FHA, VA or other "regular" mortgage. Yes, there are protections with the entity, but there are also protections while your house is currently insured and encumbered.

    Takeaway thought: if you have your current house fully encumbered (refinance or use the current mortgage + HELOC) what can be taken from you in a lawsuit? What about your liability insurance?

    So I would have to refinance out of the conventional to a commercial loan? 

    You cant have a conventional loan on a property thats in an LLC?

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Christian Weber You will have potential due on sale risks, even though small. Just keep it in your personal name, carry $1M or so in liability, as an umbrella once you have another home, sleep well. 

    0Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    For me the benefit of changing a primary residence to a rental is having been able to buy with 5% down. If you put the property into an LLC you'll need to refi at more like 20% LTV. Anyway, the benefits of an LLC for a single owner are way overblown.

    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    5y

    @Christian Weber, some lenders have no problem with this, yet many want the title to remain in your name.  You need to have confirmation that it is OK, from your lender in writing. 

    The costs of transferring to an LLC: In Florida, we have to pay doc stamp tax upon transfer of a deed at $.70 per $100, plus recording fees. There is a cost to forming the entity, around $350 with a lawyer. There is a higher interest rate for commercial loans, currently 5% or so. You may lose your tax benefits by transferring into the LLC, and have to pay capital gains tax on any gains you have...talk with a CPA about this.

    0Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    5y

    @Christian Weber

    Refinance first while you still live in it so you can get a personal mortgage or HELOC.

    Transfer the property into a land trust where you still are the beneficiary to avoid the due on sale clause.

    Then you can transfer the beneficial ownership to an LLC. You should not get any tax stamp as there is no change of control if you still own the LLC.

    The section 121 exclusion will only work if you sell the property to a different taxpayer. If you transfer the property to a disregarded LLC or even a partnership where you are still a member that will not work as it is not a sale but a capital contribution. There will be no capital gain due so no exclusion.

    If you really want to capture the section 121 exclusion while keeping control of the property you can sell it to an S Corp, but then you won’t get all the real estate tax benefit of passive income.

    0Reply
  • Tiffany Liu
    Investor · Tampa, FL · Member since 2017 · 5 posts · 1 vote
    5y

    I am also wondering if this is worthwhile and doable. if I transfer the primary property to LLC owned by my mother in law, would that constitute a sale? Or are there related party restrictions on the exclusion tax benefit?

    Has anyone actually done this and lay out the cost / benefit?

    0Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    5y
    Originally posted by @Tiffany Liu:

    I am also wondering if this is worthwhile and doable. if I transfer the primary property to LLC owned by my mother in law, would that constitute a sale? Or are there related party restrictions on the exclusion tax benefit?

    Has anyone actually done this and lay out the cost / benefit?

    There is no tax benefit. If you are not selling your property, you have no capital gain. If you sell your property, you can exclude some of the capital gain with the section 121 exclusion.

    There is no reason to use the exclusion if you don't sell.

    When you transfer your property to an LLC you don't have capital gain either.

    The only situation when it may make sense to capture the 121 exclusion in advance is when you convert your home to a rental, and you know that you will sell it in more than 3 years and you have substantial capital gain in it. If you want to keep it for a long time, you would better transfer it to your LLC as the passive income tax advantage and depreciation will probably be better than the 121 exclusion. Now if you expect to sell it in 3+ years, you will need to make the calculation if what you are losing by using an S corp is less than the exclusion that you can get with the section 121.

    0Reply
  • Tiffany Liu
    Investor · Tampa, FL · Member since 2017 · 5 posts · 1 vote
    5y

    @Mike S. Thanks Mike, your comment is helpful to frame the thinking process. I will eventually sell the property and hence want to preserve the tax benefit. It is actually currently a rental property (purchased in 2017), I am planning to move into it for 2 years as our primary residence, make some improvements and then convert it into a short term rental. 

    I wanted to put the property into an LLC or Corp to limit liabilities once converted into a short term rental and wanted to retain to retain the 121 exclusion benefit. there is probably $350k+ of potential capital gains on the property. I believe short term rental revenue would not be considered passive income. Also there may be other tax strategies like SEP IRA etc. for the Corp. So if I set up an S Corp and sell the property to the S Corp, that would be considered a sale (even if owners of the S Corp is the same)?

    I know such sale would trigger transfer tax and stamp duty tax but I think the eventual capital gain tax down the road is probably more to offset. 

    0Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    5y

    @Tiffany Liu

    https://andersonadvisors.com/121-exclusion-depreciation-tips/

    Some good primer here.

    Regarding short term rental, while it is not passive income, you can do a master lease from an LLC to a Corp to regain some of the passive income in the LLC while operating the STR under the Corp.

    0Reply
  • Issa Santos
    Member since 2023 · 35 posts · 0 votes
    2y
    Quote from @Mike S.:

    @Christian Weber

    Interested in doing exactly this. My personal residence is currently in my name. I rent out a few rooms out of the house, and live in the other part of the house. I also run a business out of the property so need to continue to live in the house in order to be allowed to run the business out of the shop in the property. 
    So to get anonymity, would like to put the property in Land Trust, but would like to use a separate trustee instead of myself so as to keep anonymity. 

    Refinance first while you still live in it so you can get a personal mortgage or HELOC.

    Transfer the property into a land trust where you still are the beneficiary to avoid the due on sale clause.

    Then you can transfer the beneficial ownership to an LLC. You should not get any tax stamp as there is no change of control if you still own the LLC.

    The section 121 exclusion will only work if you sell the property to a different taxpayer. If you transfer the property to a disregarded LLC or even a partnership where you are still a member that will not work as it is not a sale but a capital contribution. There will be no capital gain due so no exclusion.

    If you really want to capture the section 121 exclusion while keeping control of the property you can sell it to an S Corp, but then you won’t get all the real estate tax benefit of passive income.


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