Renting your own house?

Question

I am a new real estate investor, I have been reading every book, blog, you-tube video and forum  post I can absorb. The question is in Rich Dad, Robert states that owning your home is not an investment, but rather a liability. I got that, no issues.

The question is, is it legal to "sell" or deed your home into a LLC and then rent it from the LLC? You could theoretically rent it to yourself cheaper than the mortgage and have a loss as a business, as long as there are other income producing properties to offset. I can potentially see a problem of mixing money if you were to deed a property to the LLC that you personally have a loan on? But why not try and lose the liability. This would effect net worth, but how damaging is that?

Thoughts?

Matt K. · Answer

How would you explain why you rent it to your self below market rates for a loss when you get audited?

Jeffery Rymer · Answer

@Senthil N.

The premise of the book is an asset brings in cash, a liability takes cash away. So if you house isn't bringing you income, it's a liability. The book doesn't discourage home ownership, rather getting people to recognize that and to make sure your assets bring in more than your liabilities so you are truly financially free.

Jeffery Rymer · Answer

If you are referring to tax deductions for mortgage, property taxes, etc. on a schedule A, that is not what I meant. The LLC would have expenses of owning the house, mortgage, property tax payments, etc.

I, on my personal return would not have any deductions as I would be a renter. Also, the only benefit is IF someone was able to itemize. In addition, if the home is rented then there are less things that someone could come after me for. If I was going to relocate, I also wouldn't have to bother with either selling or moving it into an LLC later, I could just move and rent it out to someone else. How would owning the LLC be the exact same as owning the house out right? Especially if I have partners or other owners in the LLC? As a non-single owner LLC the income would not be 100% flow-through, there would be a modest income "earned", and then draws at the passive level for the remaining part of what I would take out.

Senthil N. · Answer

I have not read Rich Dad and the reasons why the claim is made that owning is a liability.  Here is why owning makes sense to me:  (1) You can get a house for 5% down.  That is significant considering you need 20% down for investment.  1/4th the investment money required.  (2) Lower interest rate for home owners  (3) Slightly better insurance rate  (4) Tax free capital gains tax of 250k to 500k depending on your marital status. (4) Itemized tax deduction benefit (5) You are your best renter!

The disadvantages are if you own a Condo you cannot deduct the high HOA fees.  Repairs cannot be deducted.  However you can add major renovations to your basis reducing your tax if your investment return is over the capital gains limit.

And I am unsure how renting from yourself will actually help.  You can always rent your homestead property and then rent from someone else, if for whatever reason you wanted to do this.  That is a simpler way to achieve what you are looking for.  I am curious to know why though.

Thomas S. · Answer

No legally you can not rent to yourself and have any deductions on the property. Owning the home or owning the LLC are exactly the same thing. You can not rent to yourself.

Linda S. · Answer

@Jeffery Rymer,

Your LLC would have to pay off the mortgage, or be able to get a loan for that amount, and from my experience, commercial lenders don't really want to loan anything  until you have 3 years history.     If you have all the cash for your house to be paid in full,  I guess you could-- but this seems like a crazy amount of headaches and you'd be losing so many tax perks, because once you get rid of your house, you won't itemize, and then all your other deductions are lost too.    Not worth the stress IMO.