Using my LLC to sell a house to my spouse - anyone heard of this?

[Derrek H.]

Hey BP Community,

I saw a video on Youtube by a BRRRR investor who said he was able to get money out of his BRRRR in just TWO MONTHS with his strategy. The LLC he controls bought a property for $140k and put $15k of work into it. Total cost was $155k. Then he rents it out for $2k/mo. Then his LLC sells it to his wife for $250k. (I assume his wife is not part of the LLC. He made it sound like his LLC and his wife were separate parties for the transaction.) The wife makes a 25% down payment of $62.5k and gets a bank loan for the rest. (They disclosed exactly what they were doing to the bank, so the bank was aware and ok with it.) Also, the $250k price was chosen so that the property would generate cash flow for the wife based on $2k rent/mo. The LLC pays $9k for closing costs, so the net sale is $241k. $241k sale price - $155k investment = $86k profit to the LLC. The wife has paid out $62.5k as the down payment. So net, as a family unit, economically the investor says they are $86k - $62.5k = $23.5k ahead. The investor also says that the LLC legally avoids paying taxes on the $86k because he and his wife are Married Filing Jointly (MFJ), and thus seen as one entity for tax purposes. He also said b/c they were filing MFJ, the government viewed this as a "refinance".

First, is he referring to some obscure tax law that says real estate transactions done this way qualify or are considered as "refinances"?

Second, how is the $86k totally tax free as claimed? 

Let's assume the investor has a single-member LLC and is able to issue a K-1 to himself. Would the $86k on the K-1 then go on the investor's Schedule E, page 2, line 28(k) as "nonpassive income from Sched K-1"? If so, would this income then flow to Sched E, page 2, line 41, and there be combined with any net losses the wife might report on Sched E, page 1, line 26? (Line 26 flows to Sched E, page 2, line 41.)

But still, how can all the $86k be shielded from taxation? If the wife reports expense of $7200 for mortgage interest ($187.5k @ 4.25% has about $7200 interest in year 1), $5000 on property taxes (250k x 2%), and about $4400 in depreciation (depreciating only the building, which we will say is 50% of the $250k for 27.5 yrs), the total is only $16,600. $86k - $16.6k leaves $69.4k to be taxed, right? Even after the standard deduction of $24.4k is subtracted, that leaves $69.4k - $24.4k = $45k that will still be taxed, right?

His strategy sounded legitimate, he said he checked it with his CPA and lawyer, he disclosed what he was doing to the lender, and he was clear to disclose that his LLC (not himself) bought the house and sold it to his wife. So his tax strategy _sounds_ ok. I'm just wondering exactly how he did it so that me and the Bigger Pockets community might benefit too!

Thanks!