Can you rent your house to yourself? Let me explain.....

[Trey McGovern]

So I am in a weird situation. I have been actively investing in Real Estate for the last 6 months, but have had the idea for 3 years or so. 

Over the course of that time and during my research and thinking phase, I was toying with the idea of purchasing the current house I live in and using it as a rental, but I would be the tenant (short-term). 

So the situation stands where I am currently living in a great house that was purchased at the tail end of the 2008 market. Seller was desperate, so he decided to rent it out since the flip market was literally non-existent. I ended up in the house. 

Now, I want to purchase the property (I think its a great deal and in a great location for future appreciation), but I dont have any plans on living there for any more than 2-3 years from now. It is currently a rental property, I intend for it to be a rental, both by myself, and with future tenants. 

Can I legally purchase the house through my company, AND then create a lease between either myself or my wife to the holding company. This would be run totally like a business, all expenses handled through my company, rent checks made out to the company, etc.....

Is this something that is possible? Would I have to purchase as my Primary Residence and then resell to my company when I am ready to move and make the transformation? What would the obstacles be? 

[Brandon Hall]

@Trey McGovern

"Im not concerned with creating or fabricating losses to reduce my liabilities"

It doesn't matter. Congress enacted the self-rental rules because people would rent to themselves to create losses. Now, whether you want to or not, this type of situation will be subject to the self-rental rules. There's nothing wrong with that, it's just another layer of information to navigate. 

It also doesn't matter what type of entity you are leasing from, how legit it's structured, etc. If you have a material stake in the lessor entity, you're going to be subject to the self-rental rules. 

If operating expenses plus depreciation/amortization puts the rental at a loss, the loss is considered passive. You will not be able to offset the loss (the amount below $0) with the income of the other rentals. Instead, it will simply remain suspended until your self-rental activity, or a passive investment (i.e. in a partnership or syndication), shows income. 

"What if the plan is to hold for 30+ years? And then if I do buy it personally at first, and want to turn it into an investment property to get it out of my name, what does that look like? And how do I avoid the potential taxes?"

Live in it for two years, then rent it. If, within the next three years after you move out, the property realizes significant appreciation, sell the property to an S/C-Corp that you own. The sale will be a taxable transaction, but you'll be able to use the $250/500k exclusion. On top of that, you maintain ownership of the rental at a stepped up basis. 

At the end of the day, self-rentals are more glamour than useful. But they can certainly be useful depending on the situation. One of the best reasons to utilize self-rentals is when you are an S/C-Corp and you need to extract profit from the Corp to either avoid SE taxes or 15% dividend taxes. The S/C-Corp occupies the real estate and pays rent to your LLC, which owns the real estate. That's where something like this becomes extremely useful, but not necessarily when it's in your own name.