Paying rent to my own LLC in a House Hacking structure

[Zeb Wallace]

I live in one unit of a triplex which I own (i.e., House Hacking). Both this property, and another property that I own are in a single member LLC, of which I am the sole owner. Because I have been staying for "free" in the unit, the cash flow of the triplex (and the cash-flow of my LLC as a whole) are not what they would be if I were renting out my unit.

The LLC is not generating positive cash flow, but would be if it had the additional income from my unit. As a result, I have to periodically put additional funds into the business to cover repairs to the units or the mortgages.

My question is this: What would be the implications if I were to start paying the LLC an amount of money each month that I feel represents the market rent for the unit? Are there any negative tax consequences (or other consequences) that I would suffer from doing this? Any other pro/con issues that I should be aware of?

I would prefer to pay the LLC rent, (which would make the business self-sustaining), and take periodic disbursements from the LLC when there is surplus cash not needed for reserves or other purposes.

Does anyone have any experience / thoughts on this type of a structure?

Thanks in advance!

-Zeb

[Frank Chin]

I resided in a triplex here in NY for many years, and now a duplex. There are many downsides in doing it via an LLC.

As a homeowner, if you live in 1/3, your be exempt from capital gains up to $250K as individual and $500K if married, for the owner part.

You're probably taking depreciation, and I don't know how the IRS views your taking depreciation on your owner occupied part if your depreciating it.

Then, there are estate issues, where the property is in your name, not an LLC, it could go to your heirs capital gains free.

In most states, including CA, there are homestead exemptions, if your file for it. The advantage here is in cases of bankruptcy, in CA from $100K to $175K is protected from creditors, depending on your status. I see homestead protecting the home more than an LLC, especially single member entities, or if members are a married couple. The corporate veil in these cases is simply pierced if someone sues.

And for my triplex, for homeowners, if your get homeowners insurance, it includes workman's comp which is usually not in an LLC policy. I tried to get workmans comp for rentals, and it's too complicated to implement. So if you hire uninsured contractors, under homeowners, there are some protection.

As to your LLC being cash short, and at times cash surplus, I have a business operating via an LLC, my CPA had me set up a "Loan from owner" account, and monies I put in is considered a loan, and withdrawals a loan payment. He cautioned me under certain circumstances, the IRS may look at it as a capital contribution.

It also looks like your idea would add to your rental incomes, increasing your taxes besides.

While I could see some advantages in putting rentals in LLC's, I don't see it for a home.