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? 

[Christopher McDannel]

Without reading this at all, yes you can. Gotta love corp legislation. 

[Michelle Fenn]

One other thing to consider.    I owned a dozen rentals but elected to live in a condo my Dad owned.   He rented it to me, but did not want to sell it.   When I went to the bank for a loan I was turned down because I did not own my primary residence.   Helocs and loans against investment properties are a much more difficult and expensive proposition. 

[Alexander Szikla]

Not sure why you would want to do that. Just visit whenever you want. 

Don't charge yourself rent. You can still take the losses. 

Am I missing something? 

[Manda Gouvion]

My husband and I are literally 2 days into learning about investment properties and this was our exact initial plan. We live in Texas and are considering moving to North Carolina. BUT, not yet. We thought, "hey let's buy an investment property, rent it out until we're ready to move and then live in it when we decide we're ready to leave Texas!" So all of this information I've been reading in the comments has been extremely enlightening. I'm glad we're not planning to invest for another year (baby #2 on the way!) because I definitely have a lot to learn.

[Adam Schneider]

@Greg Ellis Why are you dealing with the paperwork of renting it to yourself instead of just using it when you are not renting to third parties? (Maybe you don't trust your wife or something along those lines....)?

[Adam Schneider]

@Greg Ellis (I was being light hearted about my last comment--hope you didn't take offense).

[Aaron Henricksen]

Originally posted by @Alvin Uy:

I've been doing something similar for years.  But i do it the other way around --The Primary house is under my personal name, my biz is the renter.   I have a dedicated office space at home, which I am renting out to my biz.  The rent amount is equivalent to my total monthly mortgage.  My internet bill and phone bill and other biz related expenses are also being paid by my biz.   Its a good write-off for my biz.   

I do have to report it as an additional income on my yearly tax returns, but I believe the rent isn't taxed as ordinary income (added bonus). This is fine because also helps me lower my DTI when applying for more loans for additional property acquisition.

@Alvin Uy, thanks for this post. I've considered having my LLC buy my primary residence, and renting to myself. The main reason is that I want to hold on to my current property (I think it would be great as a short-term rental), but we were considering moving, but couldn't reasonably hold on to it and qualify for a new property based on what my DTI would be holding both residences. If, instead, I kept my current house in my name, and just leased out our spare bedroom as an office to my LLC, I believe I could count a portion of the rental income (75% if I remember correctly) into the DTI equation, thereby helping my DTI for the new property. Is that essentially what you were saying when you say it lowers your DTI?

I love this idea. Thanks!

[Greg Clark]

You'll want to consider the fact that you have to rent it for a reasonable amount (I think it's illegal to rent for way high or way low, but maybe that is a local thing), and that rent is taxable income. Then you have Depreciation Recapture when you sell, which increases the amount of taxes you'll pay then. 

[Julie Williams]

@Trey McGovern Very helpful thread and something I have been thinking about. I knew about lost capital gains taxes but not about self rental rules, which I will have to research. This was a bit of a different situation because there were tenants. I looked at a rural property In Western Massachusetts, just before the pandemic broke out. It had a house and a giant barn with two commercial tenants in it. It turned out there rents were way below market, which was a strike against it, and the back of the barn, where I wanted to put an artist's studio for myself, was in need of renovation. I needed financing. The commercial lender said they would be happy to make the loan but I absolutely must not live on premises. The residential lender said that they would be happy to make me the loan, and it was none of their business if I kept the commercial tenants but to put the rental income on my personal income taxes! It felt messy and I consulted with a real estate lawyer, which cost me $850. Ouch. He said ABSOLUTELY not to mix my own residence with tenants of any kind because of liability issues. I ended up not going forward not only because all of the above, but also because the house needed a lot of work, the barn's issues that were going to bite me in the *** in time, and I found out that it was on the flood plain below an antique dam/mill pond, on a small river that has a history of flooding and washing out bridges and blowing out dams. Ultimately I RAN from it. (The listing agent lied to me about the flood plain.) It was an interesting exercise seriously considering it. I learned a lot. Now I am planning to move to Vermont, rents are high, inventory of houses to buy low, and I am at it again. I'm looking at a $200,000 house with a non-permitted apartment (!) and an inadequate septic. There is also a boundary issue. I would be making a cash offer. At first it looked ridiculous, but I again thought of forming an LLC and renting it to myself, to protect myself from liability from the other tenant. Before I am ready to leave, I could put in a new septic and get the permit for the apartment to be legal. I talked to the town zoning administrator and she said that these always go through. Then I could rent out the house for $2000 plus and the barn apartment is already getting $1200 and is $200 under market rent. Those numbers are great. It is such a complicated property with the encroachment issue (a corner of the barn/apartment is on the neighbors property) that I probably won't move forward on it. It has been on the market for 27 days. It was under contract and their financing fell though, probably because of the encroachment issue. The rule is if the structure has been there 15 years or more (it has) it is likely to qualify for a prescriptive easement. That should be done before it sells again. Mysteriously, Zillow said it sold last September, part of the pandemic exodus from the cities, I am sure. I may hop in the car (three hour drive) and look up the deed and see if it really sold last year. I may throw up my hands and let someone else deal with that mess.

[Julie Williams]

Everyone missed a huge benefit of renting to yourself. If you would be renting anyways, because you are moving to a new area or using capital for investing is more important to you than owning your own home, you pay the rent, it counts as non passive income, and you pay taxes on it. Because the rent is pass through income and is going in your own pocket, you only are paying the taxes on the income for rent. That is huge discount. This has to be weighted against the loss of capitol gains tax and the depreciation issue. Oh, and @Greg Clark, if you rent to yourself below market, the difference is supposed to be declared on your taxes and you would have to pay taxes on that difference, so you might as well just pay your LLC market rent.

[Alexander Hogarth]

I can imagine you could run the risk of piercing the corporate veil... you would have to pay a fair rent into your company bank account and leave it there unless otherwise documented in some kind of operation agreement... and only pay out your salary etc

[Alexander Hogarth]

I pay myself as the business manager for my rental investment portfolio - but it´s a fixed amount and documented with a contract. So it´d be similar to that, but just more paper-work. Plus, as I think other people have commented, you´ll have to pay tax on the rent. Unless it´s cancelled out by your depreciation write off.

[Robert Edwards]

I'll give you my own example:
My wife and I own a duplex. Its in our own names, not an LLC. We live in one side, rent out the other side. Any improvements we do on our side, we cannot write off. Anything we do to the other side, we get to write of 100%. Anything common area (the deck, fence in the front, etc) we can only writ off 50%.

For us, the loan financing was at a much higher rate and didn't make sense through an LLC, so we purchased it personally. Now, for the first 6 or so months, both units were occupied by tenants. We didn't take over one side until then. During those 6 months, we could write off 100% of improvements (we pointed and painted the brick, etc).

So my opinion is if money isn't an issue, and you don't need financing (or the difference in financing options is negligible), definitely rent to yourself, so you can take any improvements as expenses.

And yes, at least in the state of Montana, it is legal to rent to yourself (but I'm not an attorney!) My wife's photo studio rented form another LLC she owned recently as well (sold the building this year). That wasn't an issue at all.

[Bud Gaffney]

Go directly to jail; do not pass go, do not collect $200.

[Joe Splitrock]

Originally posted by @Julie Williams:

Everyone missed a huge benefit of renting to yourself. If you would be renting anyways, because you are moving to a new area or using capital for investing is more important to you than owning your own home, you pay the rent, it counts as non passive income, and you pay taxes on it. Because the rent is pass through income and is going in your own pocket, you only are paying the taxes on the income for rent. That is huge discount. This has to be weighted against the loss of capitol gains tax and the depreciation issue. Oh, and @Greg Clark, if you rent to yourself below market, the difference is supposed to be declared on your taxes and you would have to pay taxes on that difference, so you might as well just pay your LLC market rent.

 This doesn't make sense. If your using a pass through entity, by definition you are the same as your entity for tax purposes. In that situation you are not renting, you own the home. The bank isn't going to count your rent as income. 

The IRS flat out doesn't allow this. A property is considered personal residence if it is used more than 14 days or 10% of the time by someone who owns interest in the property. You own the LLC, therefore you own the property. You live in it 365 days and therefore it is 0 days rental use.

https://www.irs.gov/newsroom/k...

The reason this is prohibited is because you are manufacturing tax losses. Depreciation, loan interest, property taxes, insurance and repairs all become "business expenses". This shields your income from paying taxes and often creates a net loss. You are not allowed to write off expenses from a personal residence. 

Personal residence is defined by occupancy, not by rent or mortgage payment. You sleep there, get your mail there, store your belongings there and therefore it is your personal residence. 

[Joe Splitrock]

Originally posted by @Robert Edwards:

I'll give you my own example:
My wife and I own a duplex. Its in our own names, not an LLC. We live in one side, rent out the other side. Any improvements we do on our side, we cannot write off. Anything we do to the other side, we get to write of 100%. Anything common area (the deck, fence in the front, etc) we can only writ off 50%.

For us, the loan financing was at a much higher rate and didn't make sense through an LLC, so we purchased it personally. Now, for the first 6 or so months, both units were occupied by tenants. We didn't take over one side until then. During those 6 months, we could write off 100% of improvements (we pointed and painted the brick, etc).

So my opinion is if money isn't an issue, and you don't need financing (or the difference in financing options is negligible), definitely rent to yourself, so you can take any improvements as expenses.

And yes, at least in the state of Montana, it is legal to rent to yourself (but I'm not an attorney!) My wife's photo studio rented form another LLC she owned recently as well (sold the building this year). That wasn't an issue at all.

Businesses can rent from the owner or an entity of the owner. That is completely different than renting your personal residence to yourself, which is not allowed per the IRS (nothing to do with state law). IRS considers a property a personal residence if you occupy it and own interest in the property. You can't claim rental expenses on a property that you don't rent. That is because by definition if you live in the property 365 days, there is 0 days rental. 

https://www.irs.gov/newsroom/k...

 This prevents people from manufacturing tax loss through expenses. 

[Julie Williams]

@Joe Splitrock This is very well timed. There is a four family with one unfinished unit I may be seeing Monday. I ran my scheme by a real estate Vermont lawyer and he loved it. But he is NOT a tax lawyer.  All I need is to get in trouble with the IRS. So if you house hack, and live in one unit, renting the other unit or units to travel nurses or long term tenants, you have to hold the property under your own name, therefore opening yourself up to liability? 

[Julie Williams]

PS @Joe Splitrock I clearly need to find a really good tax attorney to run this by, not a real estate attorney. I read the info at the IRS link you provided. Thanks for that. It does not say you can't do what I propose, it says you have to divide personal expenses incurred and tenant expenses and that your own expenses are not deductible. Also you have to rent at full market value at all times and family can't stay there during a vacancy, or it would lower the percentage of time it is dedcutible. Another concern is that if I buy the property cash, which I would, I won't be able to find a bank to "refinance" it (they call it a refinance even though it would be the first loan on the place) if I live on premises. I have found exactly one bank, Greylock Federal Credit Union, that lets borrowers buy a property under their name and put it in to an LLC, without calling in the loan and the property I am interested in is not in their geographic area. Every other lender I have asked (it has only been a handful) is allergic to the idea. Either it's an LLC, a commercial loan, you don't live there, or it's a residential loan and you do live there. In my research the only place I found loan products for owner occupancy of multi families and mixed use (shops or offices and apartments) was in Australia.

[Joe Splitrock]

Originally posted by @Julie Williams:

PS @Joe Splitrock I clearly need to find a really good tax attorney to run this by, not a real estate attorney. I read the info at the IRS link you provided. Thanks for that. It does not say you can't do what I propose, it says you have to divide personal expenses incurred and tenant expenses and that your own expenses are not deductible. Also you have to rent at full market value at all times and family can't stay there during a vacancy, or it would lower the percentage of time it is dedcutible. Another concern is that if I buy the property cash, which I would, I won't be able to find a bank to "refinance" it (they call it a refinance even though it would be the first loan on the place) if I live on premises. I have found exactly one bank, Greylock Federal Credit Union, that lets borrowers buy a property under their name and put it in to an LLC, without calling in the loan and the property I am interested in is not in their geographic area. Every other lender I have asked (it has only been a handful) is allergic to the idea. Either it's an LLC, a commercial loan, you don't live there, or it's a residential loan and you do live there. In my research the only place I found loan products for owner occupancy of multi families and mixed use (shops or offices and apartments) was in Australia.

I am familiar with taxes. You split personal use days and rental days. That is what they mean by splitting personal expenses. Any day you occupy the property is personal use. If you live there full time, all 365 days are personal use days. That is the problem. Paying rent to yourself doesn't make you a tenant. An LLC is a disregarded entity (in most cases), which means considered the same person for tax purposes. It is very clear, if you directly own or own through an LLC and stay at the property, those are personal use days.

The problem is if you rent to yourself, you are claiming all those personal property expenses as business expenses. You could deduct property taxes, insurance, repairs, utilities all as business expenses. It seems genius because you could generate enough expenses to show no taxable income. You may even have a loss that you can write off against W2 income. Turning all your personal ordinary housing expenses into business expenses sounds genius. Unfortunately this is too good to be true and the IRS is well aware of the scheme. 

There are forms of this strategy that are legal. 

Some business owners provide housing as a benefit. The corporation owns the house that the owner lives in. In this case, the business pays everything. The only caveat is that the benefit can be considered taxable. It can still be a good deal, because you are only personally paying a portion of the real expense.

Another strategy is using part of your personal residence for business. In the simplest form, this is a home office. Your business pays you for use of a portion of your property. You can also write off a portion of housing expenses, such as internet, electricity or water. In this situation, the business is renting from you personally (not the other way around).

[Joe Splitrock]

Originally posted by @Julie Williams:

@Joe Splitrock This is very well timed. There is a four family with one unfinished unit I may be seeing Monday. I ran my scheme by a real estate Vermont lawyer and he loved it. But he is NOT a tax lawyer.  All I need is to get in trouble with the IRS. So if you house hack, and live in one unit, renting the other unit or units to travel nurses or long term tenants, you have to hold the property under your own name, therefore opening yourself up to liability? 

It is a great strategy to buy a four family, live in it and rent the other units out. There are low down payment options using FHA since you are owner occupying. You can transfer the property into an LLC after closing. In reality, LLC are for liability protection only. As I have mentioned, it is a disregarded entity for tax purposes. In other words, the IRS sees you and the LLC as the same tax payer. You can live in one unit and rent the other units. You split expenses such as depreciation, taxes, insurance, etc. based on the percentage of the property you occupy. For example if the fourplex had four equal units and you lived in one, then 75% of the property is rental and 25% is personal. Buying a fourplex to house hack is the best starting out strategy in my opinion. It gives you maximum rental units staying within the bounds of owner occupied loans. Owner occupied loans are essentially government incentivized to encourage home ownership. That means lower down payment and lower interest rate, which gives you higher return on cash invested. In this strategy, you do not "rent to yourself".

[Rob Massopust]

my 2cents - lots of other good answers

1. If you are doing it for tax benefit - be cautious

2. If you are doing for financing and lender qualifying - very suspicious and could be a problem

3. Figure out your end goal, you want to build equity, cash flow etc.

Maybe as owner occupied fix up, add square footage etc increase value and after 2 years you can "sell" to your corporation. you get the tax gain up to $500k married etc, your corporation if it can qualify without you then maybe. Again check with lender and or CPA - this is just my guess

[Bud Gaffney]

Technically you can do a lot of illegal stuff. You can also spend your life in prison :)

[Julie Williams]

@Bud Gaffney I have no intention of breaking the law. I have read extensively on this topic since may last post and it is not illegal, as long as you break out the owner occupied unit and do not deduct expenses for that unit. I have run numbers on the scenario and it does not look like it it worth doing, however, since to stay on the right aide of the law the owner, as an owner occupant, has to pay market rent. 

[Tanner Sherman]

Originally posted by @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.

In regards to selling the property from his personal name to his corporation, what is stopping him from selling it to himself at an astronomical amount either extremely above or below market, and what do you see as the benefits of doing one over the other?

[David M.]

see a bunch of posts here..  Let me just add that while some have said they ahve been filing a certain way:  Do you know if the IRS has actually audited your returns?  Lets face it.  You can file "whatever you want" for a tax return until the IRS actual looks at your return...

Overall, this is a nice idea, but the self-rental rule is a kicker.  Having your rental categorized as active income while your deductions stay passive will really suck.

Good luck.