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Updated over 2 years ago, 05/05/2022
Converting primary residence to rental
I'm curious if anyone has any thoughts on this. I believe I once heard in an interview that Grant Cardone doesn't own his primary residence, he actually rents it from his business entity. Is this actually a thing? Are there any potential benefits to having your Holding Company rent you your primary residence? Just curious.
I have thought about the same thing. I'm still looking into it myself. What attracted me to it was removing my primary residence out of my personal name to make them harder to access if someone sues me personally, assuming it is setup properly. This is something I haven't fully settled myself, but from the research I have done so far going with an LLC for that Holding Company may have drawbacks in regards it its ability to be pierced (ie. vs. a properly structured LP). You should seek professional council from an asset protection attorney (and if you find a good one let me know as I am seeking one myself).
I think the other benefit is expanding the items you might be able to write-off. This should include repairs and maintenance and things like that but also depreciation. I have converted my personal residence into a rental before but I'm not sure if there are any special rules if you then rent it to yourself or if there are any complications with things like depreciation related to the way you are likely to want to transfer it into your holding company (ie. what is basis if you just transfer in with no real money changing hands due wanting to avoid significant exchange and related taxable event). Perhaps someone else has some more knowledge there.
I don't know if you have kids, but there may be an impact on financial aid if you do this. Most financial aid will give some level of exemption for your primary residence and not consider it. There is usually some cap to this (ie. 2.5x your income or something like that). Moving it into your owned company would then make it a business asset I would think. Now, the FAFSA excludes majority owned small business assets too but CSS Profile does not. In FAFSA case though you need to really make sure you run it as a business because in most cases it tries to consider real estate, regardless of how it is owned, as a personal asset, but I have read you might be able to avoid that if you can show it truly is a part of a real business.
Downsides would be you would lose STAR exemption (NY reduction in property taxes for primary residence) and the above mentioned exemption for financial aid. I believe there is also some level of exemption of a portion of your primary residence in a lawsuit. I believe it's called the Homestead Exemption, but that depending on the state, it is often not that much. There are certainly complications with changing title if you still have a mortgage on the property as well and you would need to make sure doing so wouldn't trigger the due-on-sale clause you likely have in your loan.
Again, I'm no expert on this, just sharing what I have gleaned from my own research on the subject as I have explored the same question. Interested in whatever advice others might have.
Converting your primary residence to a rental for you to live in and pay rent to yourself? Sounds unnecessarily complicated for I don't know what reason. Are you looking to convert it into a rental for a tenant? Do you own any other rental properties? Converting your primary home to a rental for someone else to live in is a great idea but then you need to find a place to live.
If you are looking to do it for the tax benefits you can essentially get the same results if you are using your home to run your business. You can deed your property to an LLC without "renting" it to yourself. The main benefit of buying a primary home and then using it for a rental is that you get the primary loan financing benefits that you wouldn't get on a rental property.
Focus on growing your investment properties for cash flow.
Quote from @Paul Camuto:
Converting your primary residence to a rental for you to live in and pay rent to yourself? Sounds unnecessarily complicated for I don't know what reason. Are you looking to convert it into a rental for a tenant? Do you own any other rental properties? Converting your primary home to a rental for someone else to live in is a great idea but then you need to find a place to live.
If you are looking to do it for the tax benefits you can essentially get the same results if you are using your home to run your business. You can deed your property to an LLC without "renting" it to yourself. The main benefit of buying a primary home and then using it for a rental is that you get the primary loan financing benefits that you wouldn't get on a rental property.
Focus on growing your investment properties for cash flow.
Thanks for your comments. I was just curious given I'd heart Grant mention it. Ultimately it would be for tax benefits etc. Agreed, it would be complicated so your point about deeding it over to an LLC might be more in line with what I had in mind. We would continue to live here as we don't have any reason to move. Thinking out loud, I am pretty sure you can write off your home office if you primary utilize it for real estate business etc (which I do) so this whole conversation quite possibly is becoming academic.....Appreciate you sharing your thoughts and helping work through it!
Quote from @Josh McWilliam:
I have thought about the same thing. I'm still looking into it myself. What attracted me to it was removing my primary residence out of my personal name to make them harder to access if someone sues me personally, assuming it is setup properly. This is something I haven't fully settled myself, but from the research I have done so far going with an LLC for that Holding Company may have drawbacks in regards it its ability to be pierced (ie. vs. a properly structured LP). You should seek professional council from an asset protection attorney (and if you find a good one let me know as I am seeking one myself).
I think the other benefit is expanding the items you might be able to write-off. This should include repairs and maintenance and things like that but also depreciation. I have converted my personal residence into a rental before but I'm not sure if there are any special rules if you then rent it to yourself or if there are any complications with things like depreciation related to the way you are likely to want to transfer it into your holding company (ie. what is basis if you just transfer in with no real money changing hands due wanting to avoid significant exchange and related taxable event). Perhaps someone else has some more knowledge there.
I don't know if you have kids, but there may be an impact on financial aid if you do this. Most financial aid will give some level of exemption for your primary residence and not consider it. There is usually some cap to this (ie. 2.5x your income or something like that). Moving it into your owned company would then make it a business asset I would think. Now, the FAFSA excludes majority owned small business assets too but CSS Profile does not. In FAFSA case though you need to really make sure you run it as a business because in most cases it tries to consider real estate, regardless of how it is owned, as a personal asset, but I have read you might be able to avoid that if you can show it truly is a part of a real business.
Downsides would be you would lose STAR exemption (NY reduction in property taxes for primary residence) and the above mentioned exemption for financial aid. I believe there is also some level of exemption of a portion of your primary residence in a lawsuit. I believe it's called the Homestead Exemption, but that depending on the state, it is often not that much. There are certainly complications with changing title if you still have a mortgage on the property as well and you would need to make sure doing so wouldn't trigger the due-on-sale clause you likely have in your loan.
Again, I'm no expert on this, just sharing what I have gleaned from my own research on the subject as I have explored the same question. Interested in whatever advice others might have.
That is some great information and food for thought. Will have to read through it a few times to digest it all. Not sure if you saw @Paul Camuto comment, but seems deeding the property over to the LLC could accomplish the tax benefits which is what I was thinking from the beginning.
Appreciate your thoughts and thorough response!
I could see the perk from a liability standpoint, but sounds like double tax. Tax on your income and then tax on the rent you paid to your LLC.