Rent your primary home from your own business entity?

[Lana Lee]

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 ?

[Steve Vaughan]

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

[Lana Lee]

Originally posted by @Steve Vaughan:

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

 What benefits would your scenario give me? I am just very new and learning things as I go.

[Russell Brazil]

@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]

 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]

Originally posted by @Russell Brazil:

@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.

 Thank you for sharing your knowledge !

[Lana Lee]

Originally posted by @Steve Vaughan:

 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 ;)

 Interesting idea, I will check it out .

Thank you

[Jeshua Patrick]

Lana Lee I see little to no real advantage to doing this unless your CPA says otherwise. As several others stated, you would lose the section 121 exclusion capabilities forcing you to either 1031x in the event of future sale or pay capital gains taxes if a gain is realized. Also, you would have to report the rent as personal income which could hurt you; however, one possible benefit would be the ability to write off repairs and updates to the property as well as losses if you incurred any on the property.

I would talk to your CPA as well as a tax attorney first though because if you did this and got audited the IRS may deem this self-dealing and hit you with all sorts of penalties and interest or worse. You don’t want that! I should know. I’ve been on the wrong end of the IRS before due to bad tax advice from a well meaning family member when I was young. It took a long time and a lot of money to get back right.

[Lana Lee]

Originally posted by @Jeshua Patrick:

Lana Lee I see little to no real advantage to doing this unless your CPA says otherwise. As several others stated, you would lose the section 121 exclusion capabilities forcing you to either 1031x in the event of future sale or pay capital gains taxes if a gain is realized. Also, you would have to report the rent as personal income which could hurt you; however, one possible benefit would be the ability to write off repairs and updates to the property as well as losses if you incurred any on the property.

I would talk to your CPA as well as a tax attorney first though because if you did this and got audited the IRS may deem this self-dealing and hit you with all sorts of penalties and interest or worse. You don’t want that! I should know. I’ve been on the wrong end of the IRS before due to bad tax advice from a well meaning family member when I was young. It took a long time and a lot of money to get back right.

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

[Mike H.]

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).

[Lana Lee]

Originally posted by @Mike H.: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).

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

[Matt K.]

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

[Lana Lee]

Originally posted by @Matt K.:

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

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

[Matt K.]

Originally posted by @Lana Lee:

Originally posted by @Matt K.:

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

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

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