Personal Residence Rental

[Paul Novak]

BP Community, I apologize if this is a foolish questions but I was hoping someone from a tax perspective could help me answer. 

Why can't I sell my primary residence to my LLC and become a tenant of my business? My business could then pay the utilities, property taxes, mortgage interest, insurance policy, and home repairs. They would be expenses for the business vs. personal expenses which would be tax deductions. I'm assuming if this was an option everyone would already be doing it but I am just curious from a professional to understand why this isn't an option.

I received a question from a friend that was somewhat similar to mine above which got me thinking.  He asked me the following:

"I have a paid off rental house that I earn a good chunk of profit on in 2024. With our new house, we have a large mortgage. I wanted to "sell" the rental house to a new LLC of mine in an effort to create an expense for the rental, and drastically reduce my tax owed. My goal is to generate more expenses on paper with the rental to reduce the taxable income for future years. How can I do that"

Again rather than give advice when I am not a tax professional I figured I would pose his question on the forums to see what response the community would give. 

[Tony Christian]

Hey Paul,

This is a great question, and it’s smart of you to dig deeper before trying something like this. Here’s why selling your primary residence to your LLC and then renting it back isn’t a good idea from a tax perspective:

1. Self-Dealing Doesn’t Work
   For tax purposes, a single-member LLC is considered the same as you, so paying rent to your own LLC is basically just paying yourself. The IRS won’t allow this as a legitimate deduction.
2. No Tax Benefit from Self-Rent
   Even if you set it up through an S-Corp (which is more complicated), the rent payments you make would be taxable income to the S-Corp. And since the S-Corp’s profits pass through to you, you’d still pay personal income tax on the rental income. In the end, it cancels out any benefit.
3. Loss of Key Homeowner Benefits
   If you sell your home to an LLC or S-Corp, you'll lose:

• $250k/$500k capital gains exclusion on selling a primary residence.
• Homestead exemption on property taxes.
• Owner-occupied insurance rates, which are cheaper than rental insurance.

1. Substance Over Form
   In tax law, the IRS looks at the substance of a transaction, not just the form. Selling to an entity you own and renting from yourself looks like a tax dodge to the IRS, and they’ll likely reject it.
2. Better Alternatives
   If you’re looking to maximize deductions, consider more straightforward strategies like:

• Renting out part of your home (like a basement or room) while still living there.
• Keeping clear records of home office expenses if you work from home.
• Investing in other rental properties that aren’t your primary residence.

Michael Plaks explained it really well in his response. There’s no real way to create phantom losses without running into issues with the IRS, and you could end up losing important tax benefits.