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

21 Replies

So I am in a weird situation. I have been actively investing in Real Estate for the last 6 months, but have had the idea for 3 years or so. 

Over the course of that time and during my research and thinking phase, I was toying with the idea of purchasing the current house I live in and using it as a rental, but I would be the tenant (short-term). 

So the situation stands where I am currently living in a great house that was purchased at the tail end of the 2008 market. Seller was desperate, so he decided to rent it out since the flip market was literally non-existent. I ended up in the house. 

Now, I want to purchase the property (I think its a great deal and in a great location for future appreciation), but I dont have any plans on living there for any more than 2-3 years from now. It is currently a rental property, I intend for it to be a rental, both by myself, and with future tenants. 

Can I legally purchase the house through my company, AND then create a lease between either myself or my wife to the holding company. This would be run totally like a business, all expenses handled through my company, rent checks made out to the company, etc.....

Is this something that is possible? Would I have to purchase as my Primary Residence and then resell to my company when I am ready to move and make the transformation? What would the obstacles be? 

I don't see any benefit.

sure you can make a lease to yourself and rent it, but what do you gain?

Same things that you do on any rental property, depreciation, write-off expenses, mortgage interest write-offs, etc.......

Easier to incorporate into my portfolio since thats where its headed anyway? Why do the work twice if i know I want it as a rental unit in 2-3 years? 

What are the benefits from owning it outright personally compared against the benefits listed above? 

Yes you could, assuming you qualify for the loan as an investment property.....who you're going to rent it to is irrelevant. But the question is, why? Financing as an owner occupant is much easier, and having an LLC/company as the buyer further limits your finance choices, eliminating conventional loans. No real advantages in buying it thru a "company", it raises your costs of financing and insurance, and eliminates a 121 tax exemption should your plans change within 5 years.

Are you able to get financing from a lender if the property is owned in a company?

Money isnt the problem, in fact it will be easier for me to finance through the business side than my personal side. 

I am most interested in benefits pro or con. I am not as familiar with the benefits to owning the home as regular person. I know the good stuff from the business side though and those benefits seem enough to me to warrant doing it this way. 

PLUS it obviously builds my business up and accomplishes the same goals in wealth building. 

So can someone elaborate more on what a $200,000 property would like to the IRS in terms of personal vs business? Like Top 3 benefits for each side? 

For instance: Business Property

Depreciation

Mortgage Interest

Expense Write-offs

As far as the 121 exemption, I am unfamiliar? Care to divulge further detail?

You get all the same depreciation, etc. regardless of how you own it, when you rent it out to someone else.  If you rent it to yourself while you live in it, you then have Created taxable income to your company (with the rents you paying yourself) that you'll have to pay taxes on, totally unnecessarily.

Let me also state that this would be the quickest path to ownership on this property for my particular situation, personal finances dont stack up well, but my business has had the good fortune of being in some great relationships with a couple banks and private investors. 

@Trey McGovern ,

You will want to work that out with your business/tax attorney. Celebrities do it, and even use it in their stand-up material (Gallagher - "The Bookkeeper", for example). I'm sure there are a LOT of I's to dot and T's to cross, however.

@Trey McGovern

Sec. 121 - live in a property you own for two out of the previous 5 year period and you can receive the first 250K (500K if married) in profit tax free (depreciation not taken so not a factor)

Sec. 1031 - Sell an investment property replace it with more investment property and defer all tax (not eliminate) including depreciation 

Tax free is a pretty big trump card to have.  And in your case you could live in it for 2 and then rent it out for three and still get the 121 exemption while simultaneously 1031ing any excess over the 121 limits.

@Trey McGovern what is your entity structure? Can you share rough numbers?

You can rent to yourself but the benefits of doing so may depend on what your entity structure looks like.

Additionally, you will need to understand the "self-rental" rules. These rules will basically make it difficult for you to claim the net taxable loss (if any) caused by your self-rental.

You will miss out on the greatest tax break available to the american public, the $500,000 exemption from capital gains on a primary residence sale.

You might want to check with a tax attorney if you think you've found a pot of gold.  Try Googling "rent house to myself":

http://www.accountantforums.com/threads/can-i-rent-my-own-house-to-myself.14044/

Short answer from several CPA-claiming posters: No.  It is called self-dealing.  I didn't read a lot of the search results.  Maybe there are some favorable ways of doing it that don't land you in jail.

Jim.

@Trey McGovern If this was allowed, everyone would just rent their house back to themselves at a loss. We could take all repairs, lawn care, utilities and insurance as an expense. The problem is you cannot claim expenses from your personal residence as a tax write off. You cannot take a loss on your primary residence through depreciation. Mortgage interest is deductible on your personal residence, so nothing to gain there. You are asking people to lay out the pros and cons, but I don't see the pros. Cons are that you end up paying more taxes and could find yourself in a questionable situation.

Talk to an accountant about your specific situation. Maybe there is some special situation that will work for you given your business. You are the first person I have heard with this great idea, which leads me to believe it is not as good as you think.

@Brandon Hall  These rules will basically make it difficult for you to claim the net taxable loss (if any) caused by your self-rental. 

>>> Im not concerned with creating or fabricating losses to reduce my liabilities, and I would certainly follow all the rules. I am curious if this efffects the depreciation value though. If that is what technically makes you have a loss, is that not considered? Or would certain things be considered separately? Like depreciation? would it be allowed? Interest on mortgage?  

@Russell Brazil  You will miss out on the greatest tax break available to the american public, the $500,000 exemption from capital gains on a primary residence sale. 

>>> What if the plan is to hold for 30+ years? And then if I do buy it personally at first, and want to turn it into an investment property to get it out of my name, what does that look like? And how do I avoid the potential taxes? 


@Joe Splitrock  If this was allowed, everyone would just rent their house back to themselves at a loss. We could take all repairs, lawn care, utilities and insurance as an expense. The problem is you cannot claim expenses from your personal residence as a tax write off. You cannot take a loss on your primary residence through depreciation.

>>> So even if it was structured, run, and documented like a legitimate business model as if I was renting to any old John Smith out there, I couldnt make any of these deductions and it would still be considered as my primary residence and disregarded as a business holding. Even though it has current history for 5+ years as being a rental property, and it would be held under my rental company next, with intentions of it being such a property, with me being the tenant for the first 1-3 years of ownership, it would not be regarded as such? 

You are the first person I have heard with this great idea, which leads me to believe it is not as good as you think. 

>>> Bit harsh, dont ya think? Im six months into this and trying to figure out best practices and strategy, so I dont know that its kookie, and I certainly dont think it ever hurts to ask questions and learn why it is, or may not be, the best practice. 

And I certainly hope you dont believe that just because YOU personally havent experienced something first hand that it makes it invalid or somehow less deserving of discussion. 

@Trey McGovern

"Im not concerned with creating or fabricating losses to reduce my liabilities"

It doesn't matter. Congress enacted the self-rental rules because people would rent to themselves to create losses. Now, whether you want to or not, this type of situation will be subject to the self-rental rules. There's nothing wrong with that, it's just another layer of information to navigate. 

It also doesn't matter what type of entity you are leasing from, how legit it's structured, etc. If you have a material stake in the lessor entity, you're going to be subject to the self-rental rules. 

If operating expenses plus depreciation/amortization puts the rental at a loss, the loss is considered passive. You will not be able to offset the loss (the amount below $0) with the income of the other rentals. Instead, it will simply remain suspended until your self-rental activity, or a passive investment (i.e. in a partnership or syndication), shows income. 

"What if the plan is to hold for 30+ years? And then if I do buy it personally at first, and want to turn it into an investment property to get it out of my name, what does that look like? And how do I avoid the potential taxes?"

Live in it for two years, then rent it. If, within the next three years after you move out, the property realizes significant appreciation, sell the property to an S/C-Corp that you own. The sale will be a taxable transaction, but you'll be able to use the $250/500k exclusion. On top of that, you maintain ownership of the rental at a stepped up basis. 

At the end of the day, self-rentals are more glamour than useful. But they can certainly be useful depending on the situation. One of the best reasons to utilize self-rentals is when you are an S/C-Corp and you need to extract profit from the Corp to either avoid SE taxes or 15% dividend taxes. The S/C-Corp occupies the real estate and pays rent to your LLC, which owns the real estate. That's where something like this becomes extremely useful, but not necessarily when it's in your own name.


Originally posted by @Brandon Hall :

@Trey McGovern

"Im not concerned with creating or fabricating losses to reduce my liabilities"

It doesn't matter. Congress enacted the self-rental rules because people would rent to themselves to create losses. Now, whether you want to or not, this type of situation will be subject to the self-rental rules. There's nothing wrong with that, it's just another layer of information to navigate. 

It also doesn't matter what type of entity you are leasing from, how legit it's structured, etc. If you have a material stake in the lessor entity, you're going to be subject to the self-rental rules. 

If operating expenses plus depreciation/amortization puts the rental at a loss, the loss is considered passive. You will not be able to offset the loss (the amount below $0) with the income of the other rentals. Instead, it will simply remain suspended until your self-rental activity, or a passive investment (i.e. in a partnership or syndication), shows income. 

"What if the plan is to hold for 30+ years? And then if I do buy it personally at first, and want to turn it into an investment property to get it out of my name, what does that look like? And how do I avoid the potential taxes?"

Live in it for two years, then rent it. If, within the next three years after you move out, the property realizes significant appreciation, sell the property to an S/C-Corp that you own. The sale will be a taxable transaction, but you'll be able to use the $250/500k exclusion. On top of that, you maintain ownership of the rental at a stepped up basis. 

At the end of the day, self-rentals are more glamour than useful. But they can certainly be useful depending on the situation. One of the best reasons to utilize self-rentals is when you are an S/C-Corp and you need to extract profit from the Corp to either avoid SE taxes or 15% dividend taxes. The S/C-Corp occupies the real estate and pays rent to your LLC, which owns the real estate. That's where something like this becomes extremely useful, but not necessarily when it's in your own name.


 That covers pretty much what I was looking for. Thank you, thank you, thank you!

Originally posted by :

@Joe Splitrock If this was allowed, everyone would just rent their house back to themselves at a loss. We could take all repairs, lawn care, utilities and insurance as an expense. The problem is you cannot claim expenses from your personal residence as a tax write off. You cannot take a loss on your primary residence through depreciation.

>>> So even if it was structured, run, and documented like a legitimate business model as if I was renting to any old John Smith out there, I couldnt make any of these deductions and it would still be considered as my primary residence and disregarded as a business holding. Even though it has current history for 5+ years as being a rental property, and it would be held under my rental company next, with intentions of it being such a property, with me being the tenant for the first 1-3 years of ownership, it would not be regarded as such? 

You are the first person I have heard with this great idea, which leads me to believe it is not as good as you think. 

>>> Bit harsh, dont ya think? Im six months into this and trying to figure out best practices and strategy, so I dont know that its kookie, and I certainly dont think it ever hurts to ask questions and learn why it is, or may not be, the best practice. 

And I certainly hope you dont believe that just because YOU personally havent experienced something first hand that it makes it invalid or somehow less deserving of discussion. 

It is not as much about the structure or whether it has been a rental for 5+ years. It is still your personal residence and therefore subject to personal use guidelines. On your 1040 tax form you will be required to declare the address of the property and you have to certify the number of personal use days which in your case will be 365/365 until the year you move out.

My point may have seemed harsh to you, but what I meant is if this was a good idea, everyone would be doing it. I am just saying this is not a common practice and may not be the best financial decision. Talk to your CPA before doing this.

Trey...I was reading over your post about renting your house to yourself.  I get the idea and the reasons you would want to do this.  As I read over the IRS code that others had posted about self rentals I had another idea that may help you.  IF (big IF) you found someone you could trust that had the same goals with self renting and had a similar valued home...you could "own" their home and rent to them and they could "own" your home and rent it to you.  You'd both benefit from the "potential" loss that occurs (just like with any rental unit).  As the property owner you could rent the unit with all utilities paid for by the landlord and all lawn maintenance paid for by the landlord.  The landlord then writes those expenses off as business expenses.  The rent amount paid could be on the very low end of the marketplace thereby keeping any profit to a minimum.   Sure you would potentially lose the tax benefit at the time of a sale and if your state offered any homestead protection you'd lose out on that.  BUT, the potential benefits could far outweigh the downside.  Another thing that could push you to want to consider this is the new tax laws.  If indeed you are not able to write off state income tax and more importantly PROPERTY taxes against your income this could be big....especially in a state like Texas where our property taxes are sky high.    

I applaud you for thinking outside the box.  For the negative nellies who shot you down, let them keep doing it the same way everyone has done it for years.  "If it were that easy, everyone would do it.".   

I'm not on BP that much but feel to reach out if you have other questions for me.

Originally posted by @Brandon Hall :

@Trey McGovern

................At the end of the day, self-rentals are more glamour than useful. But they can certainly be useful depending on the situation. One of the best reasons to utilize self-rentals is when you are an S/C-Corp and you need to extract profit from the Corp to either avoid SE taxes or 15% dividend taxes. The S/C-Corp occupies the real estate and pays rent to your LLC, which owns the real estate. That's where something like this becomes extremely useful, but not necessarily when it's in your own name.


I know this is an old post, but because the tax laws have changed this year (increase Standard deduc., eliminate personal exempt.) I am wondering if a strategy like this makes more sense.  I know for me I will no longer benefit from Itemized deductions and lose $20K+ in personal (5 total household).  So I was thinking of a strategy to restructure and make that difference up.......

I too have been think this through for a little while but even more so this year. Now we are buy property to build a home and mini farm for horses and ???. It is only 9 acres.... We own a C corp business and make a salary from this but wanted to own the farm maybe in LLC and rent it out. We also have a SFR in the area and plan to continue to build our portfolio.

Any comments, questions, feedback welcome.  Thanks.

Can I do this if I form a company in my 401K? The benefit is I still own my home, I pay rent to my 401K.  If I can't do it with my house, Can I do it with a relative's house?

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here