Rent from yourself

[Rob Cucugliello]

Trying to figure out a few things for a situation my girlfriend and I are in. It’s a great situation, but rather complicated and hoping for some guidance. 

We found an amazing 4 unit mixed use multi unit we want to live in. The "owners unit" occupies the 3rd and 4th floor and we would rent out the other three units, one of them being commercial. Since it's commercial on the first floor, we need a commercial mortgage. This means we need to buy under an LLC and not our personal. We'll also collect rent and pay expenses via our LLC and its new respective bank account(s).

Noteworthy, and Coincidentally, my gf will run her own business out of the owners unit we intend to live in. It will actually take up a sizable amount of the unit.

My question is, do we need to rent the owners unit from our own LLC? Do we sign a lease? Do we charge market rent? Or under? Or over market rent? Or do we just rent to her business and live there anyway?

Lastly, we own our current home. We will need to move out and do extensive repairs which will then end up being rented (a delayed brrrr in a way). So that will be vacant and having losses during rehab. Since that home is in my personal name, can I write off the losses as a “rental” which it’s intended to be but not quite yet? Do I need to do anything to ensure it’s possible to write it all off? I’ve never converted a primary to a rental before.

Anything else we should do, know, or consider? Again, we have so much to figure out, that any help and guidance is appreciated.

[Michael Plaks]

@Rob Cucugliello

You should not expect to sort out your multi-layered situation in an online forum. We can give you some starting pointers, but you can't really avoid engaging with your own advisors for an actual plan of action.

1. Remove your gf from the initial analysis. What if you were single and doing all of this solo? You're buying a 4-unit which really is almost like buying 4 separate properties: one personal residence and 3 rentals. Expenses will be allocated for tax purposes, and so on.

2. You will run a business out of your personal residence. This is extremely common and called "business use of a home" for tax purposes.

3. You're implying that you want to squeeze some tax benefits by structuring it as some kind of renting from yourself. As some of your fellow Italians say, forgeddaboutit.

4. an LLC would not have changed anything for taxes IF you were single.

5. Insurance and mortgage are separate non-tax issues to be dealt with.

6. What does your gf change in this setup? You will likely have a partnership for tax purposes and have to file a partnership tax return and keep business-style books. Determining whether or not this is the case takes a long discussion.

7. Your current home does not create "losses." Spending money is not the same as having losses. If it was the case, your gf would be a total loss. ;)  There are no losses until the repairs are finished and the house is ready for renters. At that point, most of your pre-rent expenses will become slowly deductible via depreciation. Again, a long discussion is needed.

Good luck!

PS. Running a real estate business together with your gf has many non-tax consequences.