Renting property from your own LLC

8 Replies

Is it legal to transfer your property to an LLC you own, then have that LLC rent it to yourself?

The intent is to separate it from the payment (assume the lender will go along with it; i've talked to them, and they will), and put "rental" income on paper, so that it could be used by the LLC satisfy debt/income ratios to secure financing on another income producing property.

Can anybody cite code sections prohibiting this if so, or any relavant federal or Georgia statutes?

Nothing wrong with this. It is actually fairly common that real property is held separate from a business. You must claim the income in the LLC and can take the expense in the business.

So, if I do this with both of my properties, I can go to the bank, claiming $X income, and nominal expenses for things like maintenance and management fees (despite the fact that I'm personally carrying the mortgage)?

Eric - I am not sure if you are looking to secure financing through the LLC or personally, but there are a couple of issues with either strategy.
If you are looking for financing in the LLC, most banks want to see a history of cash flows, like two years worth of stable tax returns, as opposed to just showing a financial statement.
If you personally are looking for the next loan , I am not sure that you would be accomplishing anything, assuming your payment to the LLC would be greater than or equal to the debt service + taxes + insurance, you would be no better off than holding the RE in your name, for this purpose.

Originally posted by Eric Uhls:
So, if I do this with both of my properties, I can go to the bank, claiming $X income, and nominal expenses for things like maintenance and management fees (despite the fact that I'm personally carrying the mortgage)?

In addition to Paul's comments above (which were right on the mark), you'll also likely be asked for a personal guarantee with any business loan, and your personal financial statement will indicate the expense of the rental without the income, so while your LLC will look good, your personal financial statement will look just the opposite.

While you can do this, I'm sure Charles missed that part about using the LLC income that you paid as qualifying income for a loan. Pumping up your business with income from a transaction which is not at arm's length will push you toward loan fraud!

If you go to the bank and show the rental income and the leases and disclose that you are the customer, to avoid any fraud issue, they will likely discount such income....since they will hold you personally responsible on the loan anyway.

If your LLC is large enough to obtain a loan on its own, you wouldn't need to pump up the company income anyway.

Hello. I am visiting this old thread with a new question given the changes to 2018 tax law. In my case the new standard deduction level of $24,000 for a married couple pretty much covers my interest deduction, the result being that I have lost the tax benefit I once had on my home mortgage. For this reason I am considering establishing an LLC and selling my home to it, then renting back from it. I would also include a rental I have owned for many years in the LLC. I would then once again be able to deduct the interest on my residence which I now would not be able to do in 2018.

Can anyone address the legality and logic of doing this?  

Thank you.

Originally posted by @Mary Daugherty :

Hello. I am visiting this old thread with a new question given the changes to 2018 tax law. In my case the new standard deduction level of $24,000 for a married couple pretty much covers my interest deduction, the result being that I have lost the tax benefit I once had on my home mortgage. For this reason I am considering establishing an LLC and selling my home to it, then renting back from it. I would also include a rental I have owned for many years in the LLC. I would then once again be able to deduct the interest on my residence which I now would not be able to do in 2018.

Can anyone address the legality and logic of doing this?  

Thank you.

From a logic standpoint: 

Would you take a new mortgage in the name of the LLC? If not, the 1098 issued by the mortgage company would still be in your personal name, not in the name of the LLC. So legally (I would assume, though I don't know for certain), you'd have to take the interest deduction in your personal name.

From a legal standpoint:

If you don't update your mortgage, you are likely technically violating your "due on sale" clause in your mortgage, which means the mortgage company can call your loan due.  It's unlikely they will, but it's a risk.

J Scott:  Thanks very much for the thoughtful reply.  So it sounds like it is legal for one to rent back property from an LLC. I understand the mortgage issues, and agree that without re-financing in the name of the LLC this could be problematic. Appreciate your response.

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