How an LLC Works for a HouseHack?

Question

@Linda Weygant

I have a couple of questions and know exactly the right person to ask so I've tagged Linda Weygant a CPA that was on podcast #244. Definitely my favorite podcast by far not sure if that is because I'm an accountant as well. Highly recommend everyone to listen to podcast #244. I've learned the most from that podcast. Whelp I've started this discussion since I'm sure other people have the same exact questions.

It is known you can NOT deduct a 100% of the expenses if you are house hacking. This is because a portion of those expenses are considered personal expenses and not business expenses. My question is why can't the formation of an LLC which the property is owned by take 100% of the deductions while you pay the same amount of rent as other tenants? Obvious reasons for this is to deduct all expenses and not do a pro-rata allocation of expenses. I believe the only disadvantage of this is that the amount of rent you pay to the LLC will be included in your taxable income once the income is allocated back to you. That being said what would you recommend structure wise for someone who is househacking? I want it to be an LLC cause it makes everything more official when you look for financing down the road. In addition, keeping separate books were 100% of the expenses are deductible will be a lot less work.

Lastly any other additional advice is more than welcomed. Please everyone feel free to chime in to provide some advice.

Linda Weygant · Answer

No.  My point is that you can't take these types of non deductible personal expenses and convert them to business expenses.  You *might* be able to get away with it if YOU were the minority (less than 10%) member in the LLC

When trying to gauge whether or not something will fly with the IRS, give it a good sniff test and ask yourself, if it were this easy, wouldn't literally everybody in the country do it?

Linda Weygant · Answer

@Charles McCabe is on the right track.

An LLC, particularly a single member LLC, is a disregarded entity, so the first issue is that you are doing business with yourself.  You are technically the exact same entity, so the IRS would not allow tax advantages based on business with yourself in this manner.

Secondly, by structuring your house hack in this manner, you are essentially taking expenses that would never be deductible at a personal level and converting them to a tax deduction.  So the repairs, depreciation, utilities, etc would become business expenses.  Therefore, the IRS does not allow this.

I'm really glad you enjoyed the podcast.  It was a lot of fun to record!

Charles McCabe · Answer

@Kisean Smith Well, you can only house-hack one property *at a time, per year*.  Remember that you only have to occupy it for a year and then you can move on and hack the next property.

As for the liability protection, I'm having trouble getting a good google hit here, but my understanding is that they can't "take your house" when it's your primary residence.  Maybe someone else can chime in with specifics.  I did see someone make reference to 250K liability exemption in Montana...

Thanks,

Chaz

Kisean Smith · Answer

@Charles McCabe Thanks for the advice Charles. Good point about the benefit of residential financing. The problem is you can only househack one property. Now that I want to expand my portfolio I would like an LLC to show Private lenders or small banks that my business is legit. Also what do you mean by househacking provides the same liability protection of an LLC to begin with?

@Linda Weygant

Thanks for the response Linda! I really appreciate it. I have an additional question. Could I take these deductions by making a multi-member LLC (aka getting someone to contribute capital for a minimal interest)? That way the LLC would be a partnership and no longer a disregarded entity. I understand I would now have to  file Form 1065 and distribute K-1s. Would you recommend that or believe the IRS would scrutinize this?

To all - Sorry if my questions/responses come off irritating. Trying to figure the best way to go about this property and future properties. Thanks a lot for everyone's guidance.

Charles McCabe · Answer

*I am not a lawyer or tax expert.*  That being said, I'm pretty sure the IRS doesn't care whether you own the property personally or an LLC owns the property and you're getting the benefit of it.  And titling to an LLC will likely preclude residential financing, which is half the benefit of house hacking.  Keep in mind that house hacking provides many of the same liability protections of an LLC to begin with.  I don't really see the advantage of going the LLC route.

Thanks,

Chaz

Charles McCabe · Answer

@Linda Weygant LOL, that's literally the question I ask myself.

@Kisean Smith To be more specific, when you're buying a property as an owner-occupant, you have to live in it for a year to avoid violating that provision.  BTW, my son lives down in Lawrenceville GA and he's also looking for a place to house hack.

Kisean Smith · Answer

Wow I never knew you could househack one property at a time per year. I’ll definitely do some more research on that.

How an LLC Works for a HouseHack?

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