To rent (to myself) or not to rent

[James Bird]

I bought a 4 bed 2 bath split-entry foreclosure 2 years ago as my first home (and still live there). I'm currently closing on my second single family and looking for a 3rd, so I set up the LLC, bank accounts, etc.

My current payment is in the 700 range and it would rent in the 1000 range. I want to use it as a rental as soon as it makes sense but that could be a few years out, hopefully sooner. I'm asking myself, why not switch now and rent to myself so it will be ready when the time comes? Also benefit from the tax advantages, improvements costs, asset protection, and start depreciation now? I plan to do everything legally (if this is legal) with rental contracts and proper paper trail.

If YES, would it make sense to rent at my mortgage rate or standard rate?

I haven't ran all of the numbers yet, so if this is nonsense please shoot me straight. I'm unfortunately still in the beginner stages and trying to find the best ways to move forward.

Thanks in advance.

[Paul Caputo]

I'd highly recommend consulting with real estate and tax professionals before doing anything like this. 

Technically you could rent to yourself by selling the property to a wholly owned entity and then renting it from that entity. You would have to pay fair market rent to the entity or it would be considered personal use and it wouldn't be a rental. This isn't that great of an idea since all the rent you paid to the entity would be taxable income, so you'd have to pay taxes on the rent you paid. Do you want to pay $12K per year in housing cost and add $12K to your taxable income at the same time? As opposed to paying $8,400 per year and not adding to taxable income? 

You would also lose any tax benefits you have from owning the home, so there's that too. If it's your residence you can get an exemption on capital gains up to $250K when you actually sell it down the road, that's not the case when you sell the rental: you have to pay depreciation recapture and capital gains. 

The other thing here is that is an unusual situation. The IRS doesn't like unusual situations, they give them a reason to take another look. They allow the rules for rental property because it is an income producing business. Living at your own house isn't exactly a business is it? 

So can you do this? Yeah. Should you? No.