Rent your primary home from your own business entity?

Question

Not sure if I picked the right category for posting my question. But I recently heard of an idea of renting your primary home from your own business entity. Let's say I want to buy a new house to live in, can I set up an LLC to make this purchase and treat my own entity as my landlord with a real lease and everything.

I can then depreciate this property and do all kids of tax write off. Is it a crazy idea, or even legal for that matter ?

Russell Brazil · Answer

@Lana Lee when you own your primary residence, and it goes up in value, you do not pay any taxes on it up to a gain of $250,000 for a single person and up to $500,000 for a married couple if you have lived in the property for 2 out of the last 5 years.  That is section 121 of the tax code. It is perhaps the single greatest tax break available.  The benefits of that outweigh nearly any other scenario.

Steve Vaughan · Answer

Most of the time, over-sophisticating things only leads to a mess and indigestion.

Doing this will take away your right to a tax-free 121 gain when you sell your primary, and I don't see any tax benefits anyway.  By the time your entity pays the mortgage that's in your name from rent you are paying to it....

Something simple to do would be to have your entity rent your house from you for 14 days or less per calendar year.  That rent doesn't need to be reported as far as I know.

Check with a tax pro before doing something either way @Lana Lee

Matt K. · Answer

Well in that case you can't depreciate for ever either lol...

Matt K. · Answer

You realize that if you were to sell it you'd have taxes AND recapture of that depreciation you took advantage of earlier?

Mike H. · Answer

I'm guessing that it would allow your business to give yourself cash from the business without having to pay any taxes on it? Your business would report as an expense but you, personally would not have to report as income? Seems fraught with risking a big red flag to do something like that.

At the end of the day, the IRS may just look at the situation and clear it up for you. This is your primary residence. Done. Any games you played with "renting" to yourself are null and void and you are now responsible for reimbursing uncle same for any unpaid taxes plus penalties - plus they're going to go thru the rest of your stuff with a fine toothed comb.

That being said, there was always a big advantage to having your home count as your primary residence anyway - you could sell it and not pay any taxes on the profit (deferred or otherwise).

But now that they limited the SALT deductions, that may change.

Then again, I'm seeing some of these states that are taking the brunt of that hit getting creative already.  The states are going to let people "donate" an amount to some state charitable operation fund and deduct that donation against their income and/or property taxes.

That will basically allow an individual to pay their property and income taxes to a qualified charity so that they can turn around and deduct that full amount on their federal return.

Example: Individual pays 15k in state income taxes and 8k in property taxes. Under the new tax plan, those people are limited to a 10k deduction in total for those amounts.

However, under the states' plans, they would be allowed to donate 23k to some state charitable fund and the state would then offset that payment in full against both income and property taxes. And the individual would then be able to deduct the full 23k on their federal return.

Seems shady to be sure as the states are basically going to give their residents a way to cheat the federal govt on what their perceived tax caps were supposed to limit. But thats what happens when you pass something that essentially targets only a handful of states (that tend to all be affiliated with the opposing party no less).

Steve Vaughan · Answer

An expense to an active income entity without income to report on the other end.  In theory I could have my property mgt s-corp (which manages my portfolio- all rents are paid to it) rent my house at air bnb rates for 13 1/2 days a year.  I would get to deduct the rental expense from my s-corp's income but don't have to report the rental income I receive because I've rented my house out for a total of 14 days or less.

I don't see how it would work though with an LLC that just owns a rental.  My example is for an entity that has actively earned income. Be sure to run all my bad advice by a tax pro ;)

Lana Lee · Answer

I was hoping never to sell, I guess:-)

Lana Lee · Answer

I Need a minute here to digest. Let me read couple or more times:-)

Lana Lee · Answer

Yes! Don't mess with IRS! I hear you. Thank you !

Rent your primary home from your own business entity?

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