Converting primary residence into rental property. LLC?

2 Replies

Hi,

I am in the process of converting my primary residence in 78745 into a rental property as I am purchasing a new primary residence. How important is it for me to protect this asset in an LLC? I want to grow this business in the coming years by acquiring more properties and want to set myself up for success from an asset protection perspective. I also understand that I will be able to deduct business expenses if I form an LLC for my rental business.

Any thoughts on if this is overkill or not?

Thanks,

Daniel

@Daniel Tisdale you'll get a different opinion from every person who replies. One fact, though, is that the deductibility of your expenses does not change whether your property is in an LLC or not. If you hold it personally, you report your income and expenses on Schedule E. If you put it in an LLC, you report the same income and expenses on the form appropriate to the method by which you elected to be taxed (1040, 1065, or 1120/1120S).

One thing to consider is the basis for depreciation. Depending on the numbers and if you qualify for the 250k/500k cap gains exclusion for it to make sense, you might be able to sell it to an entity you own tax-free on the gain (LLC taxed as S-corp for example) for a lot more than you paid and up the basis so you can depreciate more each year. Otherwise you'd be stuck with your original purchase price plus any improvements done.

For asset protection, might want to consider your current net worth, insurance limits etc. You can always deed it to an LLC later once net worth gets high enough for people looking for a quick pay day to go after.