Sale of primary residence to closely held LLC to step up basis

[rnehrboss]

Hi,

I have a home that's about to become a second home.  It has appreciated approximately $500k.  I'm thinking if quitclaim deeding it to an LLC that I setup.  I might then rent it part of the year.  

Is there advantage to this?   I  believe I can then expense property tax over $10k limit for 1040 and also deduct maintenance and depreciation?

Thoughts?

Thanks!

[Anonymous_ · Accepted solution]

The strategy you outlined is simply form over substance and would violate the economic substance doctine.

See I.R.C. §7701(o)

https://www.law.cornell.edu/uscode/text/26/7701

[rnehrboss]

Thanks for quick reply @Anonymous_. 

Maybe I didn't give enought detail.

I no longer live in the home, and will turn it into a rental home.  The LLC provides me libability protection etc.   

[Anonymous_]

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@rnehrboss wrote:

Maybe I didn't give enought detail.

I no longer live in the home, and will turn it into a rental home.  The LLC provides me libability protection etc.   

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I understand, except those details do not change the analysis and conclusion.

[Opus 17]

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@rnehrboss wrote:

Thanks for quick reply @Anonymous_. 

Maybe I didn't give enought detail.

I no longer live in the home, and will turn it into a rental home.  The LLC provides me libability protection etc.   

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If you want to protect your gain, you have to sell the home while you qualify for the exclusion, don't rent it more than 3 years.  A single member LLC is a disregarded entity, in the eyes of the IRS, you would be selling the house to yourself and it would be a sham transaction.  If you created a more complicated structure (S-corp, etc.) then you have to deal with the related party rules.  The exclusion on capital gains tax for sale of a personal home was not created to enrich landlords.  

While you can transfer the home to an LLC for liability protection, it won't change the capital gains tax you will owe when you sell the home, if you wait more than 3 years and don't qualify for the exclusion.  Also, the LLC may not offer quite as much protection as you think, depending on your state.

I suggest you speak with an attorney and a tax professional. 

[Mike9241]

quitclaim to LLC and it will have your tax basis. there would be no step-up to fair market value for purposes of depreciation. rental rules are complex.  you could be subject to passive activity loss rules or possibly not required to report income or expenses or the expense deduction could be limited to rental income.  if you eventually sell it , it may not qualify for the home sale exclusion.   you have provided few details so it's best to discuss with tax pro so you know the tax consequences