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?

[chestercran]

So here is what you have to do.

1) Be an ACTIVE participant in the LLC

2) Acquire a TIN / EIN for the LLC

3) Make sure the LLC files a 1065 using its TIN

4) Using the K-1 produced for each member take your profit / (loss) what ever that number is and add it to your other income, (wages etc.) on your 1040

This is fairly straight forward.  Note this does not apply if you are a passive member of your LLC.

[maglib]

No, If in the future, you end up having net rental income on your self rental (which sooner or later should happen or the IRS will not consider it a business meant for profit), that income will then be considered active income as you are considering materially participation already.  You have tremendous loopholes that you would have to make in these activities that the IRS keeps breaking through. I promise these only open cans of worms when the IRS gets hold of them.  There are many legal loopholes that you would need filings for with middle companies and filings.  Again, long term, you never know what the tax laws may hold and the unwinding may be worse as the IRS seems more willing to go after corporate veils currently than individuals in their taxation.

[chestercran]

Disagree.  

Regardless of the losses, the revenue and expenses has to be reported.  The depreciation is what pushes the profit to loss over 26.5 years, and that is recaptured, if and when the property sells.  Amazon reported losses for 6 years and the IRS never considered it a business not meant for profit.  But would agree that if you reap a profit from the LLC, then you would report that as positive income on your 1040.

You do need to set the rent to market rate.

[maglib]

the property would sell to the llc and no losses will be allowed to be taken but the gains will.  Expenses if not reported, get assumed reported (example, those who failed to depreciate, just lose it). My rental properties all start making income as rents rise, depreciation is not that high over the life and I purchase new properties to offset the income as passive.  We were audited for renting at full income to a relative arms length and had to go through hoops to prove it. In the self rental, the income is no longer passive income.    Read up on the self-rental traps.  Here is one article,  AICPA Today has a number too.https://www.thetaxadviser.com/issues/2008/aug/avoidingtheself-rentaltrap.html

[chestercran]

Regardless, section 469 dictates that for real estate losses, they are passive losses, (reported on form 8825 of your LLC return which in turn generates a line 2 on your K-1 partner income / loss) same as if you reported this rental income / loss on your 1040 schedule E... which then is limited to 25k if your other income falls below 100k.  That is unless you can prove you are a real estate professional (e.g. at least 50% of your time is spent on real estate activities and at leas 750 hours per year).  Then you could claim all your losses from real estate activities.  One other reason this might make sense to do is because of SALT. If your property taxes exceed $10,000 you can't deduct the excess from your income where if the property taxes were reported as part of schedule E on your return because the property is rented or passed through from K-1 line 2 because your rented real estate is part of your LLC, and you are a real estate professional, all of that property tax expense would be deductible.

[maglib]

You will miss out on the home sale exclusion when you sell the home.  Any mortgage company will probably stop the sale for others (I understand this is a cash deal so you also miss out on interest expense deductions that would be deductible on a mortgage).  Don't forget some states will tax an LLC, examples are California and NY.   An LLC is a flow through entity otherwise and reported on a personal return.   A multi member LLC  (divorce is another issue, non-community property states other issues) has to file  Form 1065, U.S. Return of Partnership Income annually with the IRS. The LLC must also give each owner a completed Schedule K-1 by March 15 of each year.  Each owner will attach their Schedule K-1 to their personal income tax return that’s filed with the IRS.  It will still flow to the Schedule E for the rental portion and have same limitations.  Again, once there is income, it is not longer passive too.    Most CPA's will tell you to stay clear.

The LLC can also file as a C corp but 21% federal tax. Or an S corp  still a pass through.

Again, you never know what tomorrow tax law will bring.

[chestercran]

For sure it's not right for everyone.  Only works to capture the loss, not for phantom income.  Only works if you plan to keep the property for a very long time and only works if you are a real estate professional.  Yes multi-member, (could be you and significant other), and as I mentioned the LLC files the 1065 with the form 8825 to report the rental losses and issues the members a K-1 

[Anonymous_]

https://www.irs.gov/pub/irs-drop/n-14-58.pdf

[chestercran]

Yes in this case the business benefit of transferring an asset to the LLC is to limit the risk of loss of all your assets from a law suit associated with the property. Any judgement would attach only to the LLCs assets an none of the other assets you own. So the transaction passes the economic substance doctrine by providing the business benefit of loss mitigation.  

[Anonymous_]

---

@chestercran wrote:

.....So the transaction passes the economic substance doctrine by providing the business benefit of loss mitigation.  

---

You can hope. Only the iRS can make that determination. Is there any precedent for your position?

[chestercran]

Yes. Absolutely, there are hundreds of thousands if not millions of LLCs that have been created to limit liability as a business purpose.

[Anonymous_]

That is not precedent. The "hundreds of thousands" of LLCs created were not created primarily to do an end run around the tax code and regulations limiting deductions on property held for personal use.

Is there any indication that the IRS has accepted this particular position (i.e., will not challenge it as being a sham transaction - simply one that is basically done for nothing more than the tax effect).

[chestercran]

Just the fact that LLCs exist regardless of the tax implications.

[Anonymous_]

The fact that LLCs exist would not be sufficient if they are used primarily for tax avoidance.

Further, LLCs are strictly creatures of state law. The IRS does not even recognize them as a separate type of entity as they do other entities. Rather, the IRS treats LLCs as disregarded (sole proprietorships if they have one member), partnerships (if there is more than one member), or corporations (if the member or members make an election).

[chestercran]

Absolutely agree 100% We are on the same page.  The reason to place your properties into LLCs is for the liability protection.  As a side benefit if you avoid taxes that is perfectly legal.  https://apps.irs.gov/app/understandingTaxes/whys/thm01/les03/media/ws_ans_thm01_les03.pdf

In this case an LLC has operating expenses. The LLC would then offset its revenue, same as any other company.  Not sure what a creature is.... The IRS does recognize the LLC's TIN and accepts tax returns in the form of a 1065 which generates K-1 for the members to use on their personal returns.  Regardless of profit or loss.

At the end of the day, doing all of this setup probably does not make sense for most individuals.  If you have multiple properties and multiple members and the house you are renting is one of many the LLC owns, it may make sense from a liability perspective.  But I'll close by saying if you are a single member with a single property this setup may have the appearance of being created without a profit motive.