Can you rent your house to yourself? Let me explain.....

45 Replies

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I've been doing something similar for years.  But i do it the other way around --The Primary house is under my personal name, my biz is the renter.   I have a dedicated office space at home, which I am renting out to my biz.  The rent amount is equivalent to my total monthly mortgage.  My internet bill and phone bill and other biz related expenses are also being paid by my biz.   Its a good write-off for my biz.   

I do have to report it as an additional income on my yearly tax returns, but I believe the rent isn't taxed as ordinary income (added bonus). This is fine because also helps me lower my DTI when applying for more loans for additional property acquisition.

@trey i am curious as to the results of your idea and strategy. I am in the process of implementing the same thing in Florida but my normal accountant looked at me like im crazy... lol. I knew i wasnt crazy once i read this thread 😅 greatly appreciate it

Hello everyone, 

Newbie investor here who has had a similar idea but not sure of it's viability. Was wondering if it's possible to have my LLC buy a second home as a rental property and "rent" it to ourselves, part of the year (4-5 mos.). The rest of the year it would be a "traditional" rental. This second property would probably be in Palm Springs area, I guessing rentals during the Summer months would probably be slower providing potential "losses" plus the typical deductions associated with rental properties. Could these losses be deducted against income from my wife's pass through sole proprietorship and reduce our tax burden there? We file jointly.

I am retired and wife is a novelist and can work from anywhere, perhaps she could write off the 4-5 months of rental as an expense, writers retreat, plot group workplace etc. Right now all her income is active income taxed at the top rate. Very few itemized deductions.

Just thinking out loud here and wondering if this is crazy, complicated or corrupt...lol. 

Thanks everyone! Stay Healthy!

Greg

One other thing to consider.    I owned a dozen rentals but elected to live in a condo my Dad owned.   He rented it to me, but did not want to sell it.   When I went to the bank for a loan I was turned down because I did not own my primary residence.   Helocs and loans against investment properties are a much more difficult and expensive proposition. 

My husband and I are literally 2 days into learning about investment properties and this was our exact initial plan. We live in Texas and are considering moving to North Carolina. BUT, not yet. We thought, "hey let's buy an investment property, rent it out until we're ready to move and then live in it when we decide we're ready to leave Texas!" So all of this information I've been reading in the comments has been extremely enlightening. I'm glad we're not planning to invest for another year (baby #2 on the way!) because I definitely have a lot to learn.

Originally posted by @Alvin Uy :

I've been doing something similar for years.  But i do it the other way around --The Primary house is under my personal name, my biz is the renter.   I have a dedicated office space at home, which I am renting out to my biz.  The rent amount is equivalent to my total monthly mortgage.  My internet bill and phone bill and other biz related expenses are also being paid by my biz.   Its a good write-off for my biz.   

I do have to report it as an additional income on my yearly tax returns, but I believe the rent isn't taxed as ordinary income (added bonus). This is fine because also helps me lower my DTI when applying for more loans for additional property acquisition.



@Alvin Uy, thanks for this post. I've considered having my LLC buy my primary residence, and renting to myself. The main reason is that I want to hold on to my current property (I think it would be great as a short-term rental), but we were considering moving, but couldn't reasonably hold on to it and qualify for a new property based on what my DTI would be holding both residences. If, instead, I kept my current house in my name, and just leased out our spare bedroom as an office to my LLC, I believe I could count a portion of the rental income (75% if I remember correctly) into the DTI equation, thereby helping my DTI for the new property. Is that essentially what you were saying when you say it lowers your DTI?

I love this idea. Thanks!

You'll want to consider the fact that you have to rent it for a reasonable amount (I think it's illegal to rent for way high or way low, but maybe that is a local thing), and that rent is taxable income. Then you have Depreciation Recapture when you sell, which increases the amount of taxes you'll pay then. 

@Trey McGovern Very helpful thread and something I have been thinking about. I knew about lost capital gains taxes but not about self rental rules, which I will have to research. This was a bit of a different situation because there were tenants. I looked at a rural property In Western Massachusetts, just before the pandemic broke out. It had a house and a giant barn with two commercial tenants in it. It turned out there rents were way below market, which was a strike against it, and the back of the barn, where I wanted to put an artist's studio for myself, was in need of renovation. I needed financing. The commercial lender said they would be happy to make the loan but I absolutely must not live on premises. The residential lender said that they would be happy to make me the loan, and it was none of their business if I kept the commercial tenants but to put the rental income on my personal income taxes! It felt messy and I consulted with a real estate lawyer, which cost me $850. Ouch. He said ABSOLUTELY not to mix my own residence with tenants of any kind because of liability issues. I ended up not going forward not only because all of the above, but also because the house needed a lot of work, the barn's issues that were going to bite me in the *** in time, and I found out that it was on the flood plain below an antique dam/mill pond, on a small river that has a history of flooding and washing out bridges and blowing out dams. Ultimately I RAN from it. (The listing agent lied to me about the flood plain.) It was an interesting exercise seriously considering it. I learned a lot. Now I am planning to move to Vermont, rents are high, inventory of houses to buy low, and I am at it again. I'm looking at a $200,000 house with a non-permitted apartment (!) and an inadequate septic. There is also a boundary issue. I would be making a cash offer. At first it looked ridiculous, but I again thought of forming an LLC and renting it to myself, to protect myself from liability from the other tenant. Before I am ready to leave, I could put in a new septic and get the permit for the apartment to be legal. I talked to the town zoning administrator and she said that these always go through. Then I could rent out the house for $2000 plus and the barn apartment is already getting $1200 and is $200 under market rent. Those numbers are great. It is such a complicated property with the encroachment issue (a corner of the barn/apartment is on the neighbors property) that I probably won't move forward on it. It has been on the market for 27 days. It was under contract and their financing fell though, probably because of the encroachment issue. The rule is if the structure has been there 15 years or more (it has) it is likely to qualify for a prescriptive easement. That should be done before it sells again. Mysteriously, Zillow said it sold last September, part of the pandemic exodus from the cities, I am sure. I may hop in the car (three hour drive) and look up the deed and see if it really sold last year. I may throw up my hands and let someone else deal with that mess.

Everyone missed a huge benefit of renting to yourself. If you would be renting anyways, because you are moving to a new area or using capital for investing is more important to you than owning your own home, you pay the rent, it counts as non passive income, and you pay taxes on it. Because the rent is pass through income and is going in your own pocket, you only are paying the taxes on the income for rent. That is huge discount. This has to be weighted against the loss of capitol gains tax and the depreciation issue. Oh, and @Greg Clark , if you rent to yourself below market, the difference is supposed to be declared on your taxes and you would have to pay taxes on that difference, so you might as well just pay your LLC market rent.

I can imagine you could run the risk of piercing the corporate veil... you would have to pay a fair rent into your company bank account and leave it there unless otherwise documented in some kind of operation agreement... and only pay out your salary etc

I pay myself as the business manager for my rental investment portfolio - but it´s a fixed amount and documented with a contract. So it´d be similar to that, but just more paper-work. Plus, as I think other people have commented, you´ll have to pay tax on the rent. Unless it´s cancelled out by your depreciation write off.

I'll give you my own example:
My wife and I own a duplex. Its in our own names, not an LLC. We live in one side, rent out the other side. Any improvements we do on our side, we cannot write off. Anything we do to the other side, we get to write of 100%. Anything common area (the deck, fence in the front, etc) we can only writ off 50%.

For us, the loan financing was at a much higher rate and didn't make sense through an LLC, so we purchased it personally. Now, for the first 6 or so months, both units were occupied by tenants. We didn't take over one side until then. During those 6 months, we could write off 100% of improvements (we pointed and painted the brick, etc).

So my opinion is if money isn't an issue, and you don't need financing (or the difference in financing options is negligible), definitely rent to yourself, so you can take any improvements as expenses.

And yes, at least in the state of Montana, it is legal to rent to yourself (but I'm not an attorney!) My wife's photo studio rented form another LLC she owned recently as well (sold the building this year). That wasn't an issue at all.



Originally posted by @Julie Williams :

Everyone missed a huge benefit of renting to yourself. If you would be renting anyways, because you are moving to a new area or using capital for investing is more important to you than owning your own home, you pay the rent, it counts as non passive income, and you pay taxes on it. Because the rent is pass through income and is going in your own pocket, you only are paying the taxes on the income for rent. That is huge discount. This has to be weighted against the loss of capitol gains tax and the depreciation issue. Oh, and @Greg Clark , if you rent to yourself below market, the difference is supposed to be declared on your taxes and you would have to pay taxes on that difference, so you might as well just pay your LLC market rent.

 This doesn't make sense. If your using a pass through entity, by definition you are the same as your entity for tax purposes. In that situation you are not renting, you own the home. The bank isn't going to count your rent as income. 

The IRS flat out doesn't allow this. A property is considered personal residence if it is used more than 14 days or 10% of the time by someone who owns interest in the property. You own the LLC, therefore you own the property. You live in it 365 days and therefore it is 0 days rental use.

https://www.irs.gov/newsroom/k...

The reason this is prohibited is because you are manufacturing tax losses. Depreciation, loan interest, property taxes, insurance and repairs all become "business expenses". This shields your income from paying taxes and often creates a net loss. You are not allowed to write off expenses from a personal residence. 

Personal residence is defined by occupancy, not by rent or mortgage payment. You sleep there, get your mail there, store your belongings there and therefore it is your personal residence. 

Originally posted by @Robert Edwards :

I'll give you my own example:
My wife and I own a duplex. Its in our own names, not an LLC. We live in one side, rent out the other side. Any improvements we do on our side, we cannot write off. Anything we do to the other side, we get to write of 100%. Anything common area (the deck, fence in the front, etc) we can only writ off 50%.

For us, the loan financing was at a much higher rate and didn't make sense through an LLC, so we purchased it personally. Now, for the first 6 or so months, both units were occupied by tenants. We didn't take over one side until then. During those 6 months, we could write off 100% of improvements (we pointed and painted the brick, etc).

So my opinion is if money isn't an issue, and you don't need financing (or the difference in financing options is negligible), definitely rent to yourself, so you can take any improvements as expenses.

And yes, at least in the state of Montana, it is legal to rent to yourself (but I'm not an attorney!) My wife's photo studio rented form another LLC she owned recently as well (sold the building this year). That wasn't an issue at all.



Businesses can rent from the owner or an entity of the owner. That is completely different than renting your personal residence to yourself, which is not allowed per the IRS (nothing to do with state law). IRS considers a property a personal residence if you occupy it and own interest in the property. You can't claim rental expenses on a property that you don't rent. That is because by definition if you live in the property 365 days, there is 0 days rental. 

https://www.irs.gov/newsroom/k...

 This prevents people from manufacturing tax loss through expenses. 

@Joe Splitrock This is very well timed. There is a four family with one unfinished unit I may be seeing Monday. I ran my scheme by a real estate Vermont lawyer and he loved it. But he is NOT a tax lawyer.  All I need is to get in trouble with the IRS. So if you house hack, and live in one unit, renting the other unit or units to travel nurses or long term tenants, you have to hold the property under your own name, therefore opening yourself up to liability? 

PS @Joe Splitrock I clearly need to find a really good tax attorney to run this by, not a real estate attorney. I read the info at the IRS link you provided. Thanks for that. It does not say you can't do what I propose, it says you have to divide personal expenses incurred and tenant expenses and that your own expenses are not deductible. Also you have to rent at full market value at all times and family can't stay there during a vacancy, or it would lower the percentage of time it is dedcutible. Another concern is that if I buy the property cash, which I would, I won't be able to find a bank to "refinance" it (they call it a refinance even though it would be the first loan on the place) if I live on premises. I have found exactly one bank, Greylock Federal Credit Union, that lets borrowers buy a property under their name and put it in to an LLC, without calling in the loan and the property I am interested in is not in their geographic area. Every other lender I have asked (it has only been a handful) is allergic to the idea. Either it's an LLC, a commercial loan, you don't live there, or it's a residential loan and you do live there. In my research the only place I found loan products for owner occupancy of multi families and mixed use (shops or offices and apartments) was in Australia.

Originally posted by @Julie Williams :

PS @Joe Splitrock I clearly need to find a really good tax attorney to run this by, not a real estate attorney. I read the info at the IRS link you provided. Thanks for that. It does not say you can't do what I propose, it says you have to divide personal expenses incurred and tenant expenses and that your own expenses are not deductible. Also you have to rent at full market value at all times and family can't stay there during a vacancy, or it would lower the percentage of time it is dedcutible. Another concern is that if I buy the property cash, which I would, I won't be able to find a bank to "refinance" it (they call it a refinance even though it would be the first loan on the place) if I live on premises. I have found exactly one bank, Greylock Federal Credit Union, that lets borrowers buy a property under their name and put it in to an LLC, without calling in the loan and the property I am interested in is not in their geographic area. Every other lender I have asked (it has only been a handful) is allergic to the idea. Either it's an LLC, a commercial loan, you don't live there, or it's a residential loan and you do live there. In my research the only place I found loan products for owner occupancy of multi families and mixed use (shops or offices and apartments) was in Australia.

I am familiar with taxes. You split personal use days and rental days. That is what they mean by splitting personal expenses. Any day you occupy the property is personal use. If you live there full time, all 365 days are personal use days. That is the problem. Paying rent to yourself doesn't make you a tenant. An LLC is a disregarded entity (in most cases), which means considered the same person for tax purposes. It is very clear, if you directly own or own through an LLC and stay at the property, those are personal use days.

The problem is if you rent to yourself, you are claiming all those personal property expenses as business expenses. You could deduct property taxes, insurance, repairs, utilities all as business expenses. It seems genius because you could generate enough expenses to show no taxable income. You may even have a loss that you can write off against W2 income. Turning all your personal ordinary housing expenses into business expenses sounds genius. Unfortunately this is too good to be true and the IRS is well aware of the scheme. 

There are forms of this strategy that are legal. 

Some business owners provide housing as a benefit. The corporation owns the house that the owner lives in. In this case, the business pays everything. The only caveat is that the benefit can be considered taxable. It can still be a good deal, because you are only personally paying a portion of the real expense.

Another strategy is using part of your personal residence for business. In the simplest form, this is a home office. Your business pays you for use of a portion of your property. You can also write off a portion of housing expenses, such as internet, electricity or water. In this situation, the business is renting from you personally (not the other way around).

Originally posted by @Julie Williams :

@Joe Splitrock This is very well timed. There is a four family with one unfinished unit I may be seeing Monday. I ran my scheme by a real estate Vermont lawyer and he loved it. But he is NOT a tax lawyer.  All I need is to get in trouble with the IRS. So if you house hack, and live in one unit, renting the other unit or units to travel nurses or long term tenants, you have to hold the property under your own name, therefore opening yourself up to liability? 

It is a great strategy to buy a four family, live in it and rent the other units out. There are low down payment options using FHA since you are owner occupying. You can transfer the property into an LLC after closing. In reality, LLC are for liability protection only. As I have mentioned, it is a disregarded entity for tax purposes. In other words, the IRS sees you and the LLC as the same tax payer. You can live in one unit and rent the other units. You split expenses such as depreciation, taxes, insurance, etc. based on the percentage of the property you occupy. For example if the fourplex had four equal units and you lived in one, then 75% of the property is rental and 25% is personal. Buying a fourplex to house hack is the best starting out strategy in my opinion. It gives you maximum rental units staying within the bounds of owner occupied loans. Owner occupied loans are essentially government incentivized to encourage home ownership. That means lower down payment and lower interest rate, which gives you higher return on cash invested. In this strategy, you do not "rent to yourself".