Renting to yourself

15 Replies

I've been thinking about this for quite some time. It seems like renting from yourself (or through an entity you own) would be a great way to reduce expenses/taxes overall. Renting from yourself would have a few 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?

I have though about it when I have been board and wanting a mental exercise. That being said their is a lot more negatives. 

*have to pay market rent- Depending on rent value versus your mortgage there could be a large margin. So you will have to pay significantly more than if it was a personal. 

*not being able to itemize and tax the tax benefit

*not being able to  use personal financing (lower inter rate and downpayment) than investment/llc rates

*higher likely to get audit!

I am sure there are even more but these are the huge reasons. Honestly in all my hypothetical thinking I haven't been able to make it work in my head unless there is another variable influxed. Ie business expenses etc!

I very much doubt I can deed my home over to my LLC, pay my LLC rent, and depreciate. In the same way that I can't put my home in a self directed IRA. But I will ask my accountant when he's done with tax season.

I do, however, rent out rooms in my home, and am able to depreciate that sq footage, as well as deduct a portion of the cleaning lady, the gardener, cable, garbage, water, heat, etc. 

Short answer is no @Scott Morris . The IRS does not allow the personal occupancy of an investment property as a way to reduce taxes. Think of a duplex. You own it and live in one side. You can only deduct half of depreciation expenses and half of repairs that benefit the entire property such as a roof repair. You can't deduct any repairs or maintenance to the inside of your unit. 

Elizabeth, as far as Itemizing goes, it would be more beneficial under the investment scenario as improvements, property taxes, insurance, and mortgage interest could be written off. For your personal residence it is only mortgage interest and you first need to overcome your standard deduction...

I'm licensed to practice Tax before the IRS Simply you can't do this. You can't put a personal asset in your business and write it off even if you are renting it from the business. Even business that lease back commercial space from other businesses where the ownership is similar have a whole bunch of special rules.

@Scott Morris

@Cameron Skinner and @Rob Beland are correct in their thinking that this type of transaction is not allowed. 

To get technical, you will be going up against the Economic Substance Doctrine which states that a transaction has economic substance if: (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position; and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

By transferring your primary residence into a LLC, you would not be changing your economic position. Further, you do not have a substantial purpose for entering into such transaction other than to simply avoid paying federal income taxes.

Now, it is true that placing a primary residence into a LLC or similar type of entity is more common than most people think, however the primary motivation is not to avoid taxes. If transfers of a specific asset or assumption of a specific liability is tax-motivated and unnecessary to accomplish a non-tax objective, then the economic substance doctrine will be applied to the transaction and it may be disallowed.

Ok so you would pay taxes on the rent you  earn from yourself  but really no extra money is coming in. Seems overly complicated for   not  much gain.   

Hello All; first post here. I actually arrived at this question from an angle that I think survives the "Economic Substance Doctrine" hurdle that Brandon Hall described. I'm purchasing a duplex and will live in one side and rent the other. I'm going to establish a personal real estate business to manage the rental side of the property. Ideally, I'd like to establish a that business as an LLC, but it seems to me that the liability protection upside of that arrangement is ... limited ... if I continue to own the property personally. So I'd like to eventually title transfer to the LLC, either after LLC rental income track record has been established, or through a land trust.

And that brings me to the "rent to myself" question. In order to maintain the "for profit" status of the LLC business, I'd need to rent my half of the duplex from the LLC at fair market price after the transfer. For the reasons already mentioned by others in this thread, it's not clear whether or not this arrangement would provide a tax advantage (pros: depreciation and repair deductions; cons: significant additional taxable income to LLC, loss of primary residence sale exclusion). But the arrangement does seem to have a clear liability-protection advantage, which is why I"m interested in doing it.

Besides the liability protection, this arrangement would also more than double the documentable rental income to the LLC, which could be useful in financing future LLC investment purchases. So what do you think, does the liability-protection argument justify this kind arrangement?

@Brandon Hall

Would the IRS's position change if a money partner was involved in the LLC? I realize that there are various types of partners, so let me posit three situations, assuming for all of them that my partner and I are both qualified real estate professionals:

1) My friend and I form an LLC, with me owning 99% of the units and him owning 1% of the units. The LLC rents the property to me for fair market value.

2) My friend and I form an LLC, each of us owning 50% of the units. LLC rents the property to me for fair market value; and

3) My friend and I form an LLC, he owns 51% of the units and I own 49% of the units. LLC rents the property to me for fair market value.

I see that having a partner eliminates (at least in part) some of the benefits sought by the original poster, but with an expensive enough property, there certainly seem to be situations where the depreciation advantage could outweigh shifting some of the income to a partner. Would any of the situations I described be allowed?

Originally posted by @John Allen :

You are going to get yourself audited over something that is solved by every other house-hacking duplex owner by just getting good insurance. 

There is literally no reason to set up a full management company for 1/2 of your duplex. 

Report it on your Schedule E, get insurance, deducted the expenses that relate to that half and move on. 

There isn't any benefit to your plan but it's going to be a hugeeee red flag to the IRS. 

Hi guys,  I saw this post and I was wonder if anyone could chime in on my issue.

newly purchased business I am in the position of not be able to buy a home for two years via conventional lending. The rental market in my new area is very tight so I am looking for alternative ways of getting into a home for my family. The business does cash flow, I pay myself as a W2 and I do have a business line of credit (125K).

Questions:

  • How else can I purchase a home before the two years?
  • Could I use the money from the line of credit as a down payment via a owner carry deal and rent it back to me at a fair marker value?

I am not looking for tax advantages or losses.  I am purely looking at a way to buy a home via the business that I can use for my family and then possibly keep as a rental down the road.  Any information if helpful and thank you!

-Niles19

I actually purchased my most recent home for myself through my solely owned LLC. (couldn't get conventional financing). Terms suck but the hope is to refinance soon. Following along!

David, did you just use the business to get a business loan or did you use owner financing (hence the terms suck)?  I am looking at possibly finding owner carry, using business line of credit to secure the home, make regular payment and then structure a balloon payment at the two year mark.

I bought an old school with the intent of turning into a home..and later a business. However, prior to closing the sellers offered us to buy the ENTIRE property at a reasonable cost, to include the old school building (for a home) and four additional rentable buildings. Although much of the cost was paid in cash, I could not finance the balance of the property as a single family home, it was too difficult and costly to divide the property, and all five units (3 1800sq ft units rented) share water, sewer, and electric. The only way to finance the property was through a commercial loan. I must have called 35 lenders ...but then found a family member to lend to me.... but he wanted in an LLC (so did the other lenders since it didn't meeet lender guidllines otherwise) so I placed it into my LLC. Down the line we desire to turn the main building (where we now live) into some type of business (ie assisted living) and so we have been developing more bedrooms, choosing ADA flooring and doors, instaling individual heat systems in each bedroom, etc....but the process may take 3-5 years to be able to pay for all the needed improvements. Us and 4 children live in the home. We rent the other buildings WITH water, sewer, and electric included. The only thing that separates where we live from the other buildings is a common sidewalk between the buildigns. We also take care of yard maintenace, control the parking lot (there is parking for about 50...we rent to two childcare centers and each has 1-2 school buses), and more..... In this instance, can the LLC rent to us at FMV where the rate is established by either a) bedroom size and what the county says is FMR under HUD guidlines for Section 8 (their values include utiliteis) or b) estamated fair market rent on a public site (such as zillow) and using the utilitiy allowance based upon a certain number of bedrooms (which changes each year). Would this situation meet the Economic Substance Doctrine? There would, of course, be tax benefits since we could write off the improvements done by the LLC but ultimately it woud come out as a wash in the end since we lose our home sale beneft and would have to recapture any depreciation later.

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