LLC Rent House To Self

13 Replies

If you are investing in buy/hold/rent SFHs, could you rent a house to yourself that is held in the name of your llc? That way, repairs could be written off. Seems shady and unlikely, but I was just wondering how the law worked.

@Ryan Haase  

As a non-cpa, my understanding of the law the IRS is very suspicious towards "family" rentals. So I would be very curious what a professional thinks of this thoughts.

Plus you wouldn't be able to get the personal property loans "deals" lower downpayment and interest rate requirements. I am also guessing you would love the ability to deduct it off your taxes. I personally love personal properties. 

But that is a VERY interesting question. I would be curious to hear from CPA's and tax professionals.

Yes you could, but you'd have to pay yourself near market rent, so then you'd be reporting that income.  Also, you'd lose the exemption from capital gains if you owned it as your personal residence.  Doesn't seem to make any sense.

This was just a new years drunken thought/discussion with my wife. We are in the process of buying a house that needs quite a few things fixed. If the house needs $15k of things fixed and rent in the area spans from $750 to $1000 per month, it may make some sense if we were only going to live in it for a few years.

Just a thought, I know home improvements are considered to be tax deductions if you can itemize and so is your interest if it is high enough. So renting to yourself would forgo the positives to give you what you are already entitled too. 

Some great conversations happen after a few New Years cocktails.

Happy New Years

Not sure how far off topic this question is, I had not thought of it until reading this thread. If you buy an investment property with your IRA, does it have to be all cash or can you finance part of it? Could you then rent the house from your IRA? No idea if this makes sense financially from the questions posed above however but interesting.

@Lee S.  

You absolutely cannot rent a property from your IRA, or have it rented or used in any way by a disqualified party to your IRA. That would be a self dealing prohibited transaction and would result in severe penalties and a full distribution of the IRA.

@Lee S. You can get a loan inside your IRA, but in NO way can you benefit from your IRA called Self Dealing. So no you couldnt rent to you, family members or business partners. Not a lawyer or accountant, but this is a big no-no and can have alot of issues come up from trying to do such.

Originally posted by @Jeremy Tillotson :

@Lee Shuemake You can get a loan inside your IRA, but in NO way can you benefit from your IRA called Self Dealing. So no you couldnt rent to you, family members or business partners. Not a lawyer or accountant, but this is a big no-no and can have alot of issues come up from trying to do such.

Thanks Jeremy, answered both my questions. Do you (or anyone else reading this) know how difficult it is to purchase a house via an IRA? I may be willing to diversify the acct a bit if it's not a major hassle.

Originally posted by @Brian Eastman :

@Lee Shuemake 

You absolutely cannot rent a property from your IRA, or have it rented or used in any way by a disqualified party to your IRA. That would be a self dealing prohibited transaction and would result in severe penalties and a full distribution of the IRA.

 Thanks Brian, missed your post before responding to Jeremy.

I've been thinking about for quite some time, I'm glad I'm not the only one. Renting from your LLC would have a couple of advantages over owning:

Depreciation deduction of the property,

Deductions of repairs (this is different than improvements),

Privacy/Risk (you no longer own a property in your own name)

It would have some disadvantages:

Loss of tax protected appreciation when sold (although a 1031 exchange handles that)

The only question remains is this frowned upon (audit risk) by the IRS?  Has anyone done this?  It seems to me that it is often done in the commercial world.  A company buys a large building in a holding entity.  Leases out part of it to itself (the other parts are leased to other companies).  Why would residential be any different?

Originally posted by @Lee S. :

Not sure how far off topic this question is, I had not thought of it until reading this thread. If you buy an investment property with your IRA, does it have to be all cash or can you finance part of it? Could you then rent the house from your IRA? No idea if this makes sense financially from the questions posed above however but interesting.

 The correct answer is - You can finance part of it, providing the financing comes in the form of a non-recourse loan by a disinterested party. When an IRA purchases real estate using a non-recourse mortgage loan, the debt financed portion of the property's profits is subject to unrelated business income tax. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the profits derived from the debt financed percentage is subject to unrelated business income tax.

As a result, only enter into this transaction with the approval of your CPA (or enrolled agent), as they will be the ones having to deal with the reporting issues.

Originally posted by @Lew Payne :
Originally posted by @Lee S.:

Not sure how far off topic this question is, I had not thought of it until reading this thread. If you buy an investment property with your IRA, does it have to be all cash or can you finance part of it? Could you then rent the house from your IRA? No idea if this makes sense financially from the questions posed above however but interesting.

 The correct answer is - You can finance part of it, providing the financing comes in the form of a non-recourse loan by a disinterested party. When an IRA purchases real estate using a non-recourse mortgage loan, the debt financed portion of the property's profits is subject to unrelated business income tax. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the profits derived from the debt financed percentage is subject to unrelated business income tax.

As a result, only enter into this transaction with the approval of your CPA (or enrolled agent), as they will be the ones having to deal with the reporting issues.

Lew made a good point about UBIT on leveraged real estate in an IRA. It is important to note that leveraged real estate inside of self-directed Solo 401k is NOT subject to UBIT.

The following link confirms that real estate may be held inside an IRA for those who are new to investing IRA funds in real estate.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Investments

Also, the following link discusses the IRA prohibited transaction rules:

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Prohibited-Transactions

Lastly, for those who are self-employed, you can open a solo 401k, then process a solo 401k participant loan and subsequently use the borrowed funds to invest in real estate outside of the solo 401k or IRA. See following link to learn about the 401k loan rules:

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans

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