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?

[Anonymous_]

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@WizerNow wrote:

....What did you learn as to the pros and cons of this type of transaction?...

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Again, it depends upon the post (strategy) to which you are referring.

For federal income tax purposes, establishing a single-member LLC in which you are the sole member, will not work if you are contemplating "selling" your primary residence to the LLC and then renting it back from the LLC. 

Note also that if you managed to "sell" (contribute) your primary residence to some other entity, such as a C corporation, and rent it back from that entity then, at a minimum, you would stand to lose the Section 121 (home sale exclusion) when the property is ultimately sold.

As @DanielV01 stated, you absolutely need to seek local legal counsel and/or engage the services of a local tax professional.

[chestercran]

OMG that's what umbrella insurance is for.

So with the limit on 10k for SALT if your property tax is say 30k and your cost of ownership with maintenance and depreciation on a several million dollar property property is another 50k that you could not deduct off of your federal taxes.  Now you have 80k plus off of your federal income tax from the LLC negative income. (RENT - EXPENSES).

Depreciation, maintenance, repairs, etc. etc. are not deductible on your personal property. So place the property in LLC and rent it back. Every single cost associated with maintenance and repairs and depreciation and taxes and interest is now totally the sky is the limit. 

It's unfortunate the tax system works that way but businesses get to deduct ALL expenses associated with its real estate.  Not so unfortunately for the poor individual owner of the same sort of property.

[chestercran]

LLC profit / loss passes through to the members of the LLC as a percentage. the 1065 generates a K-1.  We make sure that with depreciation, repairs, maintenance, insurance, interest, HOA, milage, etc. etc. expenses the income is negative so it actually reduces your 1040 income tax due.

[SundayInSalem]

You may find this article "Can You Rent To Yourself?" by CPA Jeremias Ramos helpful.

Ramos explains losses from your self-rental will be passive — and nondeductible — unless you have other passive income so your losses may not reduce income on Form 1040:

"If your expenses exceed your taxable income then you’ll run into passive activity loss limitations. If you don’t have passive income to offset those passive rental losses then chances are you’ll have non deductible losses. Even if you did have passive income there are special IRS rules that prevent taxpayers from benefiting from self rental losses. Therefore, you’ll either have non deductible losses or create taxable income."

[Mike9241]

some other issues

maybe your mortgage has a due on sale clause which means that you would have to pay off the mortgage on its "sale".   

then there is

Prop. Reg. Section 1.280A-1(e)(7), Example 4
Limitations on deductions with respect to a dwelling unit which is used by the taxpayer
during the taxable year as a residence.
(e) Personal use of dwelling unit--
(1) General rule.
For purposes of this section and Sections 1.280A-2 and 1.280A-3, a taxpayer shall be deemed to have
used a dwelling unit for personal purposes on any day on which, for any part of the day, any portion of
the unit is used--
(i) For personal purposes by the taxpayer or any other person who has an interest in the unit;

thus personal use would require you to treat this as a personal residence and not as a rental property. the FMV rent rule applies when renting only to others not to yourself. 

[chestercran]

If you are an active member in the LLC for rental property management, taking care of repairs, property management, etc. then it is not passive income/loss.  You can also have an LLC rent a portion of your home for the LLCs business purpose.  That portion of the home's expenses, (depreciation, taxes, insurance, HOA dues, maintenance, repairs, etc.) offset the rental income and become profit, (or loss) on your 1040 schedule E up to the AGI limitation.

Unless you have multiple properties to place into the LLC for the purposes of separating the profit/loss of the business from your own income it would probably not make sense.  But if you do it is a great way to make sure the LLC captures all of the expenses associated with all the properties.  Everything from lawn care to snow removal, to insurance and taxes.  What ever that number is plus the revenue is add / subtracted from you income on 1040.  Just make sure you materially participate as an active member in the LLC.

[chestercran]

So, not sure this is correct.  The company is the owner and is a separate legal entity.  The company creates a lease that you as the tenant sign.  Everyone who rents a home is using that home for personal use.  But you are not renting from yourself that's why it's important to have that legal separation.

[mtf1]

Thanks to all for your good answers on both sides of the argument. Unfortunately I’m still unsure how to proceed. 

[Anonymous_]

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@mtf1 wrote:

Thanks to all for your good answers on both sides of the argument. Unfortunately I’m still unsure how to proceed. 

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Authority has been cited in this thread, including that cited by @Mike9241.

Read through the following Reg.:

https://www.bradfordtaxinstitute.com/Endnotes/Prop_Reg_1_280A-1d.pdf

[chestercran]

This is all correct.  You are NOT I repeat NOT using the LLCs property for personal use without a lease agreement which requires the tenant to pay rent.  The company has an asset which it leases to someone.  You are paying RENT that the company has to report as INCOME.  Otherwise the LLC would be illegally not reporting its income.

[chestercran]

Read Example 1 B.  The property has to be rented.  The property is not available for personal use because it has been RENTED 100% of the time.  Regardless of who the lessor is.

[chestercran]

https://fundsnetservices.com/can-you-buy-a-house-with-an-llc-and-rent-it-to-yourself

[maglib]

https://www.irs.gov/pub/irs-utl/2013_NTF_Self-Rental_Tax_Dilemmas.pdf

Since you can't take the passive losses, there is no benefit of renting via an LLC and a potential issue on the sale of the property. 

These transactions have not met the smell test of any audit that I've heard of.  Be very careful in going this route. The sale of the property is even more burdensome. Minimum taxes is another issue you would have.

[Anonymous_]

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@maglib wrote:

Since you can't take the passive losses, there is no benefit of renting via an LLC and a potential issue on the sale of the property. 

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From the link that was posted:

A disregarded entity is an LLC that does not file its own tax return.

So if you are going to buy a house with an LLC and rent it to yourself, you need to make sure it is an active LLC that is filing taxes.

So, total nonsense and inaccurate; an LLC that has a single member (without an election to be treated as a corporation) is disregarded for federal income tax purposes irrespective of whether the LLC is an "active LLC".

[mtf1]

My LLC is cash rich. I would have the LLC buy the property without debt, so no interest expense but could depreciate and have the normal costs charged off net in g to a small profit or break even. So having a passive loss is a non issue. Does this change your answer?