Primary Residence Turned Rental - Any Tax Savings Available Now?

Question

Good afternoon all! Long time lurker, first time poster, glad to be here.

I was house hacking my primary residence in Conroe, Texas but I am going to turn it into a full blown rental as I'm away from home for work regardless. As they say, you need to have your own business to write things off in order to pay less in taxes. However, this will only be one property and I'm going to lose my homestead exemption status.

Is one rental property enough to create an LLC and start writing things off? Everyone speaks of writing off depreciation and such to save massive amounts in taxes. At what point do you really start to capitalize on that?

Also - if anyone has any recommended podcasts/learning resources for this type of topic, I'm all ears.

Thanks BP!

Ryan Thomson · Answer

Hi @Lucas Carroll. Great first question. I've actually done three househacks myself and just met with my accountant today to get ready for filing 2021 taxes. We talked about a lot of what your question asks.

First of all, an LLC offers no tax advantage (according to my CPA). It just passes through to your personal income taxes.

Other things to consider with your taxes though.

1. Use an accountant to file your taxes. They are worth every penny.

2. While I lived in my house hacks I was able to depreciate the percentage of the square feet of the home that was occupied by my tenants. This was while I lived there. Once I moved out (to the next house hack) I was able to start depreciating the full value. In addition to depreciating that percentage you can also deduct expenses that are for the whole house at that same percentage while you live there. E.g. repairs, supplies, etc.

3. Make sure you talk to your accountant about Qualified Business Income Deduction (QBID). It basically allows for your first 20% of rental income to be tax free.

Natalie Kolodij · Answer

There's no tax benefit of an LLC. And a SMLLC doesn't mess up your 121 exclusion either so if you occupy it for 2 years and then fully rent it for 3 you can still potentially sell it tax free.You need to report the rental activity of the house -hack  right now. You get to depreciate fully rental use spaces, and deudct a pro-rata of all expenses. Once you move out those readjust.

Ryan Thomson · Answer

@Lucas Carroll thanks man! I can't take credit for the name though. Craig Curelop (the house hacking guy) came up with it. I just switched to his team.

Having a girlfriend on board AND doing her own, is HUGE!

Basit Siddiqi · Answer

@Lucas CarrollYou can start depreciating and taking deductions when you have 1 rental property.You don't need an LLC to take advantage of deductions / depreciation.

Joe Splitrock · Answer

Your CPA may want to file amended returns. You are legally required to reclaim depreciation when you sell. That means whether you realize the tax benefit or not, you will pay later. You definitely want to fix that.

Joe Splitrock · Answer

@Lucas Carroll if you were house hacking, then you already have a rental business. You are required to claim income on your taxes and you should already been claiming depreciation. An LLC is not required and gives you no added benefit on taxes. Without an LLC, you are just a sole proprietor which is still a business. The only shift that happens when you no longer live there is the entire house can now be depreciated. Have a CPA setup your depreciation.

Wayne Brooks · Answer

@Lucas Carroll As mentioned, you can still use all of the same deductions leaving it in your personal name…..there is No tax advantage whatsoever in transferring the property to an llc.

Bradley Dosch · Answer

I just have my couple house hacks in my own name and claim the deductions that way. I don't really see a point in using an LLC yet. I like the Fi Team podcast by @Craig Curelop

Lauren Cutchen · Answer

Hey! Congrats on taking the next step! Generally, it's fine to keep a single rental property in your name. Yes, you'll lose homestead exemption for tax year 2022. You'll still keep the tax benefit when filing your taxes. In my experience, it costs like $200 to form an LLC, and then it was around $400 to file taxes under an LLC with a CPA, not to mention the fees they'll charge filing your personal returns. I didn't find it to be worth it. Also, be aware that a lender has your name, not the LLCs name. I've heard folks say there is a "due upon sale" clause if you switch ownership from you to your LLC. For one home, I don't think it's worth doing an LLC - in my opinion. Just keep up your rent rolls, expenses, and keep a detailed file. Also, talk with a CPA and see what they have to say. There's always a benefit for another "level of protection," but at this point, in my opinion, you'll be fine without one.

Good luck!

Lucas Carroll · Answer

@Ryan Thomson Thank you Ryan! Clever real estate team name, by the way. The QBID is totally new to me so it does sound like I just need to pony up and hire a professional given the sheer amount of new info people have provided. I appreciate you taking the time to respond.

I'm moving in with my girlfriend who is also house hacking her house, so I think I found me a good one. Thanks again, Ryan!

Primary Residence Turned Rental - Any Tax Savings Available Now?

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