Personal tax benefits if property is under LLC?

[Dan N.]

Hi

I hear everyone talk about tax benefits and deductions (mortgage, depreciation etc) from owning real estate.
However, what´s not clear to me is how can I apply these benefits and deductions to me personally if I plan on owning a property under an LLC?

Wouldn´t all those benefits go toward that specific LLC?

Thanks in advance

[Clark Peterson]

Hi @Dan N., 

This question comes up a lot with the clients I work with who are looking at owning properties for a mix of personal use and rental investment. A couple of key tax benefits many are familiar with are the mortgage interest deduction, the state and local property taxes deduction, and the capital gains exclusion on the sale of primary residences. These all apply to individuals who own homes primarily for owner occupied purposes. When you get into the rental investment property space, there is a whole new world of tax benefits that heavily favor real estate properties held as investments, such a depreciation and cost segregation studies, general deducibility of business expenses, and 1031 exchanges (relates to capital gains). 

If you're not planning to own a home for rental investment purposes but own it in an LLC to, for example, accommodate a multi-owner vacation property, you may deduct interest paid on your home mortgage(s) if the mortgage amounts on your primary residence and secondary home are no greater than $750,000 (if married filed jointly) or $375,000 (if married filing separately or single). If your combined mortgage balances exceeds those thresholds, you may still be permitted to deduct the interest you paid on your home mortgage, but the amount of deductible interest will be phased out or limited.

To be eligible for the home mortgage interest deduction, you will have meet the following requirements: 1) you file an individual tax return on IRS Form 1040, or 1040-SR and you itemize your deductions on Schedule A; 2) you owned a home that is secured by the home as collateral for the mortgage or other secured debt (i.e. deed of trust), and 3) the home was your primary residence or a second home that you treated as your secondary home.

If you rent out the second homed (for more than 14 days), your mortgage interest is deductible just as a business expense just any other business expense is deductible. The deduction taken against any rental income you receive would be pro-rated based on the number of rental days vs. personal use days. The portion of mortgage interest not reported as a deduction against your rental income may still be taken as an itemized deduction on your Schedule A subject to mortgage limits referenced above. 

You cannot take advantage of capital gains exclusion on the sale of a primary residence if you hold that property in an LLC, but there's no reason to hold a primary residence in an LLC anyways. LLCs are good for rental investment properties and multi-member vacation properties held for personal use.

Hope that helps!