LLC line of credit to purchase, live in, flip?

[Andrea F.]

Any advice, suggestions, or strategies on this scenario would be greatly appreciated: My husband and I are purchasing a single family home at auction (we have done our due diligence) as a first investment property. Of course cash is required before bidding. We will use, say, the $40k in our LLC bank account to make the purchase (we want the purchase to be made by the LLC to avoid any issues with piercing the veil, etc) to buy and hold, rehab, and eventually rent out--plot twist: We want to live in the home for the first year or so then move and rent it out. I've seen some say "just live in it" indicating that there is nothing that needs to be done legally for us to be occupying the property owned by the LLC so question 1) is whether this is the case or not. It seems that this would be tampering with the "corporate veil" or borderline intermingling personal with business or appear that we used business capital for our own primary residence... 2) There will be close to $60k equity in the property therefore if we were to ever wish/need to tap into the equity, would a quit claim of deed to ourselves for a personal mortgage until we move, then back to the LLC to rent it out (it will be owned outright so no due-on-sale worries etc), or a commercial refinance in the LLC name be the best course of action to pull out equity for investing in additional property?

[Account Closed]

Please, I am not suggesting or advising.  Just providing information for your consideration.

"Live-in-then-rent" is an excellent strategy.

But the strategy is that you will avoid all capital gains taxes by first living in the property long enough to qualify for the Section 121 exclusion.

Here's how you do it.

1.)  Buy the property in your own name.

2.)  Live in it for at least two years.  This qualifies you for the Section 121 Exclusion of all capital gains taxes when you sell the property, provided you do it within five years after you buy it.

3.)  You move out, keeping it in your own name, and rent it for three years.

4.)  Before the end of five years from the time you bought it, you sell it.

5.)  You will pay zero capital gains tax because under Section 121 you owned and lived in the property for two of the prior five years, even though it continued to go up in value during the three years that it was a rental.

6.)  You will pay a 25% Depreciation Recapture Tax on the depreciation that you claimed during the three years that you rented the property, but not on the capital gains which accrued during that time.

7.) Yes, during the three year rental period you will be without the protection against personal liability provided by having the property owned by a Limited Liability Company (LLC) which you own.

8.)  However, you can create another legal entity which you own and have that legal entity purchase the property when you sell it after five years, and you will continue to enjoy it as a real estate investment.  You could even sell it to the entity after the two years of qualifying for the Section 121 exclusion, but there is usually not that much appreciation in the first two years.

I have a chapter about Section 121 and Section 1031 in my book, as well as on my site.

Let me know if you have any questions.

Michael Lantrip