Hi. I am hoping somebody can give me a little bit advise. When our permanent residence was build we made sure part of it was set it up to be finished as a mother in law/ duplex. That part of the house is getting close to be done and hopefully rented soon. My question since it is our residence would it make sense to put the rental portion of the house into a LLC? Or the whole house? What are the tax advantages/ disadvantages? I'm also wondering if we were to sell the house would we be able too if part of the house would be in a LLC. Thank you for any help.
@Franka Hauck - You most likely couldn't put the rental portion into an LLC while keeping the primary residence portion in your name unless the property is split on the deed, or it is setup as a co-op or condo type situation.
Keep in mind, the purpose of an LLC is asset protection. Setting up an LLC and keeping an LLC active costs money, not a ton, but it costs money. So if you don't have a lot of assets to protect, an LLC might not be worth it.
Also, making sure you home owner's insurance is setup to cover the rental onsite and having adequate coverage will take you a long way. Then it is pretty cheap to add an umbrella policy which will provide you with a ton of liability protection. The cost for insurance could be a lot cheaper than running an LLC.
Now if you have hundreds of thousands to millions in assets, it would be worthwhile to talk with an attorney.
One last thing, if you have financing on said property, transferring it from your name into an LLC could trigger a due on sale clause, which means you would have to get new financing. You can read on the forums about all the different viewpoints on this.
Andrew gave you some valuable tips.
A couple things to keep in mind
1) Charge market rent to your inlaws. Charging below market rent can allow the IRS to disallow deductions related to the rental portion.
2) You should be able to expense/capitalize costs associated to indirect items to the whole house. Furthermore; you can expense/capitalize items directly related to the rental portion.
3) When you sell the building - The personal portion of the residence will qualify for section 121 exclusion(250,000 or 500,000 depending on filing status) and the rental portion will qualify for a like-kind exchange.
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