We, husband and wife and our children, live in a paid-off house (A1) with short commute to work.
For the sake of better school district, we are buying another house (A2) and plan to live there for the next 8 years.
We, husband and wife, own an LLC that owns two rental properties (B1 and B2).
Not an accountant, the husband learned as necessary and took on the bookeeping and tax filing duties for the LLC, using Quickbooks and H&R Blocks.
We like the house (A1) our children grew up in. We like having the option to move back (to A1) after children finish high school in 8 years.
Our plan is to hold (A1) as rental, so we have the option to move back, 8 or more years later.
We have concluded that it's better to hold primary residence personally, outside of LLC, due to considerations 1, 2, 3 below.
We are familiar with holding and operating residential rentals through an LLC, so we’re considering transferring ownership of (A1) to LLC while it is a rental for at least 8 years. What we're not familiar with is the transferring process and cost, especially in the case of transferring the property back from LLC to personal ownership when we want to use (A1) as our primary residence again. Do you know what are the tax (and other) burdens we would encounter when (A1) is transferred into and out of our LLC? Below are facts/considerations we've gathered. Knowing how costly and difficult it is to move (A1) into and out of LLC will help us to decide whether to transfer (A1) into the LLC.
Considerations:
1. Personal capital gain from the sale of home you lived in 2 full of last 5 years is qualified for exclusion up to $250,000, or $500,000 jointly with spouse.
2. Rent payment to LLC is taxed as LLC income. If primary residence is owned by LLC and LLC rents to its owners, the rent paid by owner to LLC becomes taxable income.
3. Property tax is reduced for non-business owner and owner resident.
4. Conveyance tax is 0.3% of sales price here.
5. Conveyance tax can be exempted if the real property is transferred "to or from a person when no money or other valuable and tangible consideration readily convertible into money is paid or to be paid for the real estate and the transaction is not a gift".
6. Expect depreciation recapture to be taxed at 25%, and remaining profits from the sale of a rental property to be taxed at the capital gains tax rate of 15%.
7. Depreciation recapture can be deferred with 1031 exchange.
8. Capital gain tax can be deferred with 1031 exchange or exempted as sale of home (per consideration 1).
9. When an investor passes away and person-owned rental property is inherited, the property basis is stepped-up and the heirs pay no tax on depreciation recapture or capital gains.
10. Rental property related tax deductions are the same whether rental is owned by LLC or person.
11. Process for transferring Real Estate to an Ohio LLC (https://fclawlib.libguides.com/deeds/transferringtoLLC)
12. Process for transferring Real Estate from an LLC to myself, not specific to Ohio (https://moghullaw.com/blog/2020/08/how-to-transfer-title-of-property-from-llc-to-myself-deed-title-and-other-key-considerations/)
13. When transferring rental real estate to an LLC, accumulated depreciation on the rental is also transferred to the LLC. Need to figure out how to do this in Quickbooks and on Tax return.
14. Insurance must be changed to a landlord's policy when a primary residence becomes a rental.
15. Taking rental out of LLC and converting to primary residence (https://www.heraldtribune.com/story/special/2019/10/20/real-estate-matters-taking-rental-out-of-llc-and-converting-to-primary-residence-good-idea/2488910007/)
16. A limited liability company or a corporation has the same rights of an individual in every state in this country. As such, a limited liability company can sign a quitclaim (or grant deed) transferring real property from its ownership to an individual which can then be recorded in the county where the property is located. Before this is done, there should be minutes of the meeting and its approval of the suggested transfer kept in the limited liability company's books for future reference.
