Renting from my LLC for my primary residence

Tax, SDIRAs & Cost Segregation
7yFollow

Renting from my LLC for my primary residence

J. Mitchell Bernier
Lender · Southwest Georgia · Member since 2017 · 315 posts · 278 votes

I had an intriguing thought today as I was driving home and was wanting to see if this was possible, let alone legal. Let me start with some background. I live in farming country in South Georgia and one of the things that I learned was that farmers are some of the best when it comes to using tax loopholes. One of the more popular ones I see is when a farmer owns land and then that same farmer creates an LLC for his farming operation and rents the land from himself. This allows him to write that rent expense off his income, and you guessed it is always the same amount of his loan payment.

So my question is can REI's do this as well, but flip the script. Can I purchase my primary residence through my LLC, then rent from LLC to live in? In theory this would allow me to depreciate my home on my business tax return and write down the interest and taxes off the business income. If I don't do this I am not able to depreciate my home or write off taxes or interest due to the doubling of the standard deduction.

I am not a CPA, but am curious what others may think 

0Reply
28 views

Most Popular Reply

Bob NortonPro Member
Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
7y

@J. Mitchell Bernier The reason that a farmer rents his land to his farming LLC is that he pays SE taxes on his farming income, but rental income is not subject to rental income. So, he reduces his overall SE taxes by lowering his farming income, but he still pays regular income tax on his rental income. As @Tom S. mentions, by placing your primary residence into an LLC removes your ability for a tax-free gain on the sale of your home (since it is owned by your LLC and not you.)  Also, when you sell it, you would have to pay tax on depreciation recapture.  As @Natalie Kolodij mentions, there are special rules for "self-rentals", an example is that you cannot deduct rental expenses in excess of your rental income.  So, you will not be able to deduct much of the depreciation on the property (or other expenses if you don't charge yourself market rents) while you rent it to yourself.  And, if you did generate a profit from renting to yourself, then you would be paying taxes on phantom income (which is income that you never actually received.)

2Reply
See this reply in the discussion

8 Replies

Jump to latestLatest
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    7y

    @J. Mitchell Bernier For tax purposes and reporting income rental / expenses, the LLC is ignored. It's listed on Sch E of your personal tax return. In addition, if it's your primary home, it don't believe you can depreciate it.

    Even if you could do it, you would lose one of the largest benefits of a primary residence, the $250,000 non taxable gain when you sell.

    0Reply
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    7y

    @J. Mitchell Bernier

    It’s still income. You are paying yourself. Where is the benefit? The loan interest is deductible in either case. 

    [email protected]215-283-2868
    0Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    7y

    Sounds illegal, or at the very least a good way to get audited.  Not sure about GA but with the $800 / year fee in CA it probably wouldn't be worth it.

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y

    There are rules regarding self rentals. 

    Also a SMLLC = You for federal purposes. 

    You would also have to literally pay yourself rent...so you'd be.....creating double taxation on yourself. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    0Reply
  • J. Mitchell Bernier
    OP
    Lender · Southwest Georgia · Member since 2017 · 315 posts · 278 votes
    7y

    Thanks everyone for all the responses. Clearly I am misreading the tax rule regarding all this. Thanks for the help!

    0Reply
  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    We really should make this thread a sticky.  This comes up at least once a month.

    You cannot convert personal non-deductible expenses to deductible expenses with structuring.  Google "substance over form doctrine."

    See IRC Sec 262 and the related regs which expressly disallow all personal expenses unless they are specifically allowed by the IRC.

    G.D. Parker, Inc. v. Commissioner.  U.S. Tax Court, TC Memo. 2012-327 is a good read as well.

    2Reply
  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    7y

    @J. Mitchell Bernier The reason that a farmer rents his land to his farming LLC is that he pays SE taxes on his farming income, but rental income is not subject to rental income. So, he reduces his overall SE taxes by lowering his farming income, but he still pays regular income tax on his rental income. As @Tom S. mentions, by placing your primary residence into an LLC removes your ability for a tax-free gain on the sale of your home (since it is owned by your LLC and not you.)  Also, when you sell it, you would have to pay tax on depreciation recapture.  As @Natalie Kolodij mentions, there are special rules for "self-rentals", an example is that you cannot deduct rental expenses in excess of your rental income.  So, you will not be able to deduct much of the depreciation on the property (or other expenses if you don't charge yourself market rents) while you rent it to yourself.  And, if you did generate a profit from renting to yourself, then you would be paying taxes on phantom income (which is income that you never actually received.)

    2Reply
  • Brian Pfaehler
    Investor · Trafalgar, IN · Member since 2016 · 95 posts · 58 votes
    7y

    @J. Mitchell Bernier I’m always baffled at how people want to make things so complicated with little to no benefit with all the LLCs and who pays who. Keep it simple and the tax benefits are still there. Good luck.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free