Tax Benefits of House Hacking

[Parth Patel]

Hello guys,

While I've listened to many bigger pockets podcasts, I'm new to the community and this is my first post. At 30 years old and after a long educational journey to become a doctor, I'm finally at the point in my life where I will be able to purchase my first property. I have close to $200k in medical school debt and about $30k of savings that I can use for a down payment or closing costs. However, I also have the option to use a physician loan with 0% down payment which I plan to utilize (my interest rate will be about 0.125% higher than a conventional loan). 

I was wondering what my tax benefits would be if I were to "house hack" and rent out a bedroom on a W2 income of $300k+. Yes, doctors should be rich enough to not need to rent out their house, but I'm still single and the argument could be made that I don't even need a 3 bed 3 bath house to myself, not to mention the increased risk of buying a property in a new state where you don't know if you'll like the new job. I feel this would be a good way for me to decrease my risk in case the housing market turns, good way to get into real estate and learn how to manage tenants, leases, taxes, and how to be a landlord. I'm also hoping I would get some tax benefits as I'll be paying close to 40% in taxes on my W2 income, and hopefully use the additional revenue to buy a second property the following year. 

Should I buy the townhome under a business as opposed to my personal name? Wondering if this would decrease my liability if I were to get sued by a patient. Secondly, would my taxable profits from house hacking be the total rent - the mortgage such that I can take a loss and reduce my taxable income.

Thanks!

[Natalie Kolodij]

Quote from @Jon Fletcher:

Hi @Parth Patel and @Natalie Kolodij I would have thought that purchasing the property through an LLC would be a no-brainer. Because it reduces liability and allows for all the property-related expenses to be treated as business expenses. It essentially creates two clear buckets; your personal income (W2) and expenses, and your business income and expenses.

Nope. An LLC changes nothing for your tax situation or income buckets.

And the only way an LLC potentially, offers any protection is if it's fully separate from you personally. 

So if you're living in an LLC owned asset- you're already co-mingled.

It's only a no-brainer if you don't understand what they do/don't do/ how they work.