Should I sell my primary home to my LLC and rent back? 2018 limits personal deducts, not biz. No cap. gains due on sale side & Id pay fair market to LLC for rent?

[mtf1]

Thanks! One important piece I left out is that my personal joint 2019 income will be below $78,750 (both retired) even if I dividend around $30k annually from the c-Corp so I won’t pay any personal income taxes on the dividends (within the zero percent range).  Doesn’t that change the answer to go with the C-Corp?   Thanks again. 

[greatdude1]

I am thinking same as mtf.  In my case, I have borrowed money from my LLC.  There is a significant debt that I owe to the LLC.  I  believe that would qualified as economic substance doctirne.  I am selling my house to my LLC to payoff the debt to LLC. 

Do you think it would work?

[Anonymous_]

With respect to holding an asset such as real estate (e.g., a rental property) in a C corporation and the stepped-up basis at death, hopefully, it is clear that although the heirs receive a stepped-up basis in the shares, the actual asset does not (the corporation owns the asset, not the decedent, and corporations do not die).

[maglib]

The IRS doesn’t love what it calls form-over-substance techniques, and instead relies on substance-over-form principles. In other words, you typically can’t repackage one thing (like residential real estate) as another thing (like rental real estate) and pretend it’s not the first thing to avoid paying taxes.

 The IRS has long considered profit motive as a critical factor to determine whether an enterprise is legitimate.  Rental real estate has a long term profit motive although may show losses up front, there is an ultimate goal once homes are depreciated.  This is not your goal... another reason the IRS would reject it. 

This also falls into what is considered related party transactions and you can not report losses on non arms length related party transactions.https://taxmap.irs.gov/taxmap/ts0/relatedpartytransa_o_12ae2a31.htm

The Tax Cuts (TCJA) also adds a layer in the form of a new loss deduction rules.  https://home.kpmg/content/dam/kpmg/us/pdf/2019/03/tnf-wnit-tcja-apr1-2019.pdf

This is another one of those, well everyone is doing it....  just a matter of time before they are caught.  And as others said, other costs and loss of deductions may more than offset your perceived positives.

[huskerlewis]

Were you able to exclude gain personally when sold to LLC.  I am looking at doing exact same thing for exact same reasons.  Additionally, I went through career change so only real way to unlock equity.

[mtf1]

I still haven’t done anything as I’m still unsure of the consequences. I deeply feel that I have adequate substance but still looking forward more guidance. Regarding your situation, I suspect you would have to recognize a gain personally since it is truly a sale transaction. 

If anyone has deep knowledge in this area, I would welcome your thoughts!

[Anonymous_]

@mtf1 wrote: "My goal is not the legal protection of the LLC. My goal is to legally save taxes."

Section 7701(o) Clarification of economic substance doctrine

(1) Application of doctrine

       In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—

(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and

(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

[WhatToDo]

I have been thinking of doing something along these lines, and my searches have landed me here. It seems like there are some knowledgeable people here, so I figure I'll ask.

I currently own a condo, and am looking to purchase a home. I would like to keep the condo, but was looking to get some equity out, and would eventually like to own several rental properties. The purchase of the new home is completely separate, and not reliant on the equity of the condo. If I form an LLC, can I sell the LLC the property at market value, or even less, gain the equity, and then run the condo through the LLC? My hopes would then be to build business credit for two years and begin borrowing to fund additional properties. This seems to make sense to me, but I am not too knowledgeable in this area.

Thank you

[Anonymous_]

@WhatToDo 

You need a tax professional and/or financial advisor but note that you cannot sell property you own in severalty to an LLC you also own. You can contribute your property (the condo) to an LLC of which you are the only member but that property will go into the LLC with your adjusted basis. 

Again, seek professional counsel before forming a business organization and contributing property to that organization.

[mtf1]

Just to be clear, are you saying if the adjusted basis if only $400k and market value is $450k, you contribute to the LLC at $400k? This seems counter intuitive because usually the IRS would want to tax a $50k capital gain at the personal level. Could you please elaborate a bit more on this?

Also, once the property is contributed to the LLC and I personally rent from the LLC and issue market rental payments to the LLC, the LLC could then depreciate and charge other normal rental costs to the LLC’s income statement, correct?

Thanks very much!

[Anonymous_]

Yes. The property you contribute to a business entity, such as an corporation or partnership/LLC, is tax-free provided you are in control of the organization after the contribution.

With respect to your second question, are you planning, personally, to rent from your LLC? Hopefully, you understand that a single-member LLC (without an election to be treated as a corporation for federal income tax purposes) is a disregarded entity.

What are your goals here?

[mtf1]

My LLC can pay cash for my property, and the cash received can eliminate my personal mortgage debt. Then I can personally rent back the property from the LLC l, write off the usual rental expenses and be personally debt-free. What do you think?

[Anonymous_]

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@mtf1 wrote:

What do you think?

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I think it will not work for the reasons I stated previously.

[WizerNow]

There were numerous posts from two years ago on this matter.  What did you learn as to the pros and cons of this type of transaction?  I am considering doing the same thing next year and want to avoid any unforeseen obstacles.  I would be selling property, taking my profits to buy my personal residence and then paying rent to my LLC.  Thoughts?  Insights?

[DanielV01]

@WizerNow  If you read the posts and references in this thread, you will see that this type of transaction is fraught with tax-legal difficulties at a minimum.  No one in this thread has recommended trying it.  If you see a tax strategy, you would do well to discuss such with a tax attorney to discuss whether it is legally viable or even advisable.