Rent from your own LLC

[Matthew T.]

Thoughts on buying a home in one of your LLCs and renting it to yourself?

[Dan Schwartz]

Not worth it and possibly disallowed by the IRS. The CPAs can chime in.

But think through it:

1) you lose the Section 121 exclusion of $250-500,000 of capital gains. That's a enormous tax savings. Yes, you can 1031 out of your LLC, but that's a tax deferral, not a tax exclusion.

2) you can depreciate the property in your LLC. When you sell the property (or complete the series of 1031 exchanges started by it), you have to pay depreciation recapture tax.

Take an example house worth $200,000. $160,000 of it depreciable (land doesn't depreciate), and 10 years later you sell it for $300,000.

When you sell your personal residence, you will owe zero taxes on the proceeds wired to you by the title company.

When you sell your rental property, you will owe (in rough terms):
Capital gains tax of $20,000 on the $100,000 gain
Depreciation recapture tax of $14,545 on the $58,182 of depreciation you've taken.

For your future tax bill of almost $35,000 (vs zero if you keep it in your personal name), what benefits will you see today?

You get to deduct your mortgage interest and property taxes on schedule A. You can't deduct renovations.