@Brent Salazar
And I would caution against LLC for the following reasons:
First off don't use an LLC when house hacking, because it may prevent you from getting the financing you want. For instance, low-money-down, Fannie Mae, or FHA-backed mortgages can't be held under an LLC. As a first-time home buyer, you're able to put down as little 3.5 percent with an FHA loan. But this type of loan is available only to people purchasing primary residencies aka under your personal name.
The same bank that would allow you to purchase a property for just five percent down may require 20 percent down for you to buy using your LLC. Think about the type of investing you want to do before starting an LLC.
Plus, you might be able to get lower interest rates when purchasing a property as yourself, not an LLC.
“Special tax breaks”
Interest on a mortgage for a primary residence is tax-deductible on your personal income. And if you opted for an FHA loan with a low down payment, your mortgage insurance is also tax deductible.
You might not be able to claim either of these tax breaks on your personal tax return were you to move the property into an LLC. These tax breaks are especially important to highly leveraged owner-occupiers—like house-hackers—who pay lots of interest and mortgage insurance each month in the first few years of ownership. Even in pass-through entities, like single-member LLCs, these tax breaks are minimized because investors can't leverage as much. Putting down five percent or less through an LLC is a rare feat.
“Tax-free capital gains”
Assuming that you live in the property for at least two years—and assuming that the property appreciates over that timeframe—you can sell your investment for a tax-free capital gain. This gain caps at $250,000 for a single person and is limited to primary residences only. Unlike a 1031 exchange, the money is truly tax-free and can be spent on your next vacation, manicure, or other non-real estate assets.
Assuming that your property appreciates 10 percent over the next two years, I’m looking at a cool $20,000, instead of perhaps $13,000 after taxes. That’s a meaningful difference to me.
