Best way to structure owner occupied duplex for tax purposes?

Question

Hello,

I have a to give a shout out to this community. Several months ago I made a post regarding buying a multifamily property in my area of Pinellas County, Florida. At the time, I did not even know I could purchase, but Brian from Tampa helped me see the light.

Now that I am in the property and end of year looming, I want to get the tax situation established.

I've owned businesses and know how to structure those, but this being my first property I am having some concerns/doubts on thr best way to structure this for maximum tax benefit.

Stats: Owner-occupied homestead (property tax exempt due to military disability) although that won't start until January (currently paying about $600 monthly in taxes).

we have already floated some of the monthly payment on that unit and looks like we might be paying the majority of that payment a couple more times this year as it is the slow season. Already have it full booked from December to May however.

property: duplex

use: Owner occupied on 1 side and mid-term length rentals on the other side (30-90 days average booking).

Business structures: LLC, sole-propietor, or some form or corp.?

I would like to maximize my tax benefits and use the funds to invest in another business/property.

We have already spent money repairing different things that have broken, and make some small improvements (About 6k so far).

Current incomes (wife and i): I have about 70k untaxed annual income

Wife is W2 just under 100k

In previous years weve been able to gget ur tax burdens down really low where we get a nice size payment at tax time because of past businesses, and my biggest fear is owing at tax time with our new situation.

David M. · Answer

@Christian Chartier

As mentioned, a legal entity does nothing for your taxes unless you are investing with a non-spousal partner...

Also, its usually not advisable to hold your residence in a legal entity.  From a tax standpoint, you lose the sec121 exclusion as mentioned above.

Its not advisable either to hold real property in C or S Corp...

You even mentioned sole proprietor...  they still get the same accounting / tax filings as a LLC...  its really the same thing..

You can't have your rental characterized as an active business.  The IRS specifically categorizes rentals as a passive investment.  So, relook the regulations and/or consult a truly qualified professional.  Also, there are plenty of threads on bp where people are trying to get around the passive nature (not so successfully).

Oh, if you use a legal entity to hold Title, you will lose your veteran/disability tax exemption...  Also, you will/should have to pay for commercial lending since legal entities are not eligible for conforming residential loans.  Dont' go swapping Title back and forth.  Remember, loan officers don't have a fiduciary responsibility to you.  The corporate veil is a legal matter.

Good luck.

Michael Haynes · Answer

Hello Christian Chartier in St. Pete. You need to read the IRS rules for First Time Home Buyer's. You can live in your First Property as your Homestead for 2 out of 5 years and Sell, Tax-free for up to $250,000. Why did your Agent or Title Company tell you this? Because they don't care.

Julien Jeannot · Answer

I see two components at play here:

1. legal - asset protection and limiting liability

2. Tax optimization

Both of which should be addressed by a licensed professional which experience in your situation as more variables listed above needs to be considered. DIY at your own peril, you'll only find out when you made a mistake until something goes wrong and when it does, it usually much more costly to fix then hiring the pros up front.

I'm a CPA and I use a CPA that is an expert in supporting what I do. If you are running it like a business, hire a professional team to do so.

Might as well add in an insurance agent who helps REI because how you structure that piece will plays into the de-risking liability. For example adding umbrella policy and which policies represent the LLC vs your personal affairs.

Ash Hegde · Answer

For income tax purposes, a single owner LLC is disregarded and treated the same as the individual owner. You will still get the depreciation, mortgage interest, and other expenses if you leave it in your name. An LLC is used more for asset protection, which may be a benefit to you, but Wayne brings up good points about possible complications since you are occupying it.

Christian Chartier · Answer

Thank you for the feedback. It was my understanding that there are more tax advantages when you run the rental as a "business" instead of classifying it as an "investment."

Looking at the regulations, it's not hard to qualify a rental as a business. I manage it, spend time marketing, and repairs and improvements etc.

I want to take advantage of depreciation, mortgage interest, expenses and deductions while also protecting myself against liability. Your saying I can do all that as is?

The last couple here, one of them got a bit too drunk and tripped off the deck and fell in the pool.

After that incident, I feel it's necessary to distance myself from the asset through a corporate structure.

Wayne Brooks · Answer

@Christian Chartier An llc will not give you any more tax deductions than owning in your own name. Plus, it could affect your homestead exemption and possible section 121 exclusion later. You essentially have two separate properties, for tax purposes. One is your personal residence and the other unit is an investment property.