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?

[liberty2496]

Already have LLC that owns multiple rental properties.  If property is owned and operated by LLC, I believe LLC could deduct taxes, interest, etc. and would be able to start depreciating as well.  Within next couple years, will renting out this house to others at least half of the year, so it will eventually need to be classified as a rental property anyway I believe and I would have to pay rent for the time I spend here in order to classify as a rental?  I think there is, (or was), a 2 week limit for owner stay in a rental, but assume that this doesn't apply if I'm paying rent to LLC?  Not sure, but I will loose a lot of personal deductions this year and trying to look at everything to arrange according to new laws.  I've read a lot of articles about moving personal property into LLC and renting back, but nothing specifically aligns with this situation nor are there any current / post 2018 tax law info that I can find.

[SweetieJean]

Please seek out local professional assistance, as there are legal, state and local issues as well. But here are some  things to consider:

1. If your state has a homestead exemption on property tax, then your LLC is not going to qualify for it. So your property tax bill will be higher.

2.  The LLC will not qualify for Section 121 Capital Gains Exclusion on your primary residence whenever it sells the home. 

3.  Your property insurance will likely be higher, as you have to pay for a landlord policy owned by the LLC, and a renters policy in your name.

4.  Unless your house is owned free and clear, it would violate the lender's Due on Sale clause.

So there is cost/benefit analysis to be done.

[liberty2496]

Thanks!  I would finance house under LLC upon sale.  All other properties are financed this way.  It would also allow me to cash out the equity by selling it to the LLC, who would be paying fair market value for the property.  My sale to the LLC should qualify for exclusion from capital gains when selling primary residence- but yes, I understand the LLC would incur applicable capital gains when it sold the asset at some point in the future.  The insurance may be slightly higher, but it would be an LLC business expense, and the increased insurance cost is marginal, that wouldn't be a big hit overall - in fact would probably have benefit as none of my insurance is deductible now on this property.  The homestead exemption would be eliminated, but again, it's marginal.  The insurance would be deductible, as the property taxes and mortgage interest would be, which would more than offset the marginal increased operating costs, which would now be deductible and would not be under new laws.  While capitol gains may have an impact, unless property appreciates measurably in the next 15 years- the ability to deduct interest, insurance and property taxes, (all which will now be eliminated under new 2018 laws), would more than offset the 15-20% gains hit the LLC would take upon dissolving the asset in 10 - 15 years, (assuming no additional changes, LOL:)).  I can't find anything that forbids this type of transaction - but thought someone here might see something I've missed.

[SweetieJean]

Just remember that depreciation recapture can be taxed at 25%. Also, are you the only member of the LLC? Is it taxed as an S Corp?

[SweetieJean]

If the LLC has just one member (you), unless you choose to have the LLC taxed as a corporation, you would still show mortgage interest and property taxes on Schedule A of your personal return.

[SweetieJean]

The rent you pay to the LLC is taxable to the LLC.

[R0297]

Great info guys.  Do you have a contract between your LLC and yourself?  Different EIN vs. SSN?  What if I pay less then the contract amount or miss payments?  I know you can do this with commercial property... what about residential?

[mtf1]

If the LLC that now owns the property that leases back to you chooses to be taxed as a C-Corp, can the LLC deduct depreciation expense?

[Carl]

In a nutshell, what you may "save" now you will end up paying "at least" 3 times over whenver you sell or otherwise dispose of the property. Additionally, if your primary residence is in the LLC and a tenant of one of the other properties sue you and win, you can potentially lose your primary residence too.  In the past a rental dwelling policy was actually cheaper than an homeowner's policy because it only covered the structure. But that has been slowly changing over the last few years where a rental policy is about 10-20% more than a homeowner's policy.

Then there's the "offset" costs of needing two insurance policies - one to cover the property and another to cover the possessions. If your state offers a homestead exemption, you lose that which means you pay more in property taxes.  Matters can be further complicated if your state taxes personal income.

Overall, I would suggest you seek professional help in your local area, as that so-called "veil of protection" offered by an LLC is so thin, it's a joke. You'd be more successful carrying a clutch of bowling balls in a wet paper bag. 

Unless it's a multi-member LLC I always recommend against putting residential rental into a single member LLC. It's a waste of time since rentals generate passive income that gets reported on SCH E.

[mtf1]

My goal is not the legal protection of the LLC. My goal is to legally save taxes. If I rent from my LLC that is taxed as a C-Corp, then it appears that I can depreciate and also legally avoid the SALT limitation so I can deduct property taxes beyond $10k.  I’m not concerned about selling as I would let my children inherit the property so no capital gains issue. Also, I can fortunately do this sale from me to the LLC using cash, no mortgage, so “due on sale” mortgage issues also don’t apply. Plus, the C-Corp only gets taxed at 21%.  It seems like a “no brainer”, what am I missing?

[mtf1]

Can someone help me here? If I can purchase a home for cash either personally or through an LLC, wouldn’t it make sense to purchase thru the LLC, choose to have the LLC get taxed as a corporation (21% tax rate) lease back the home and pay rent to the LLC, and let the LLC legally deduct depreciation and property taxes ( beyond the 10k limit if held personally) and other expenses?  The depreciation plus expenses would offset most of the rental income. I don’t care about the 500k cap gain exclusion because I’ll let my heirs inherit the home. What am I missing?

[Anonymous_]

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@mtf1 wrote:

....What am I missing?

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The economic substance doctrine of Section 7701(o) of the Internal Revenue Code is one element.

The doctrine essentially provides that a transaction must have both a substantial purpose and economic effect aside from reduction of tax liability to be considered valid. Your proposed transaction has no purpose or effect beyond reducing your income tax liability.

[mtf1]

Thanks. Since the property is in a different state as my primary residence, would buying thru the llc  to avoid that state’s probate qualify as a substantial purpose, in your opinion!

[Anonymous_]

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@mtf1 wrote:

Thanks. Since the property is in a different state as my primary residence, would buying thru the llc  to avoid that state’s probate qualify as a substantial purpose, in your opinion!

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The problem at the outset is that merely buying through an LLC (or corporation) would not avoid probate. Joint tenancy, trusts, TOD accounts, life estates, and the like avoid probate; interests in LLCs and corporations generally do not.

Even assuming the transaction did avoid probate, I sincerely doubt that would be sufficient, in and of itself. Basically, your real economic position needs to change (in a way that, presumably, benefits you).

[Cirrus12]

That's correct that the new C Corp rate is a flat 21%.  Based on your comments I'm assuming your personal top rate is higher than that.  But you also need to keep in mind that the 21% on the corp's profit and it's not your money.  To operate as a C corp you'll need to put yourself on payroll which means roughly 20% in payroll taxes between federal and state, then your regular income tax rate on whatever your w2 wages are.  If you want to take money out beyond that then they're treated as dividends which (best case scenario) will be taxed at your long term capital gains rate.  In either case you're looking at over 40% no matter how the money comes out.  (payroll tax + personal tax and/or corp tax + personal tax).   It's rare that putting real estate into a corp is a good idea.