Can you Buy a House with an LLC and Rent it to Yourself?
The short answer to this question is yes, you can buy a house with an LLC and rent it to yourself but not without some rules and stipulations.
Many people want to know if they can purchase a house and rent it to themselves.
Self rentals are appealing because many people think they can use their home ownership as a tax benefit.
In their minds, they think the LLC will get to deduct all of the expenses that go along with home ownership such as the real estate taxes, mortgage interest, utilities, and more.
While it may seem like a good idea to have a “self rental,” there are several things you need to consider before doing so.
First and foremost, you cannot rent your LLC to a disregarded entity.
A disregarded entity is an LLC that does not file its own tax return.
So if you are going to buy a house with an LLC and rent it to yourself, you need to make sure it is an active LLC that is filing taxes.
Furthermore, if you are going to rent to yourself, you better make sure that this will be a true rental.
Be sure to collect the rent each month and declare it, etc.
One issue with collecting and declaring rent is that you are generating taxable income for the LLC from yourself.
So you are actually going to be paying tax on your rent money.
For example, let’s say you put your home in an LLC and rent the home to yourself for $2,000/month.
That $2,000/month becomes taxable income for the LLC and if you don’t have enough expenses to offset the rental income, this is called phantom income, and it doesn’t really benefit you in any way.
You either will have non deductible losses on your tax return or you will be creating taxable income.
Another thing to consider before setting your home up as a self rental is the long term tax implications.
If your home is a rental under your LLC, you will be required to take a depreciation deduction on your home to offset the rental income.
Should you choose to sell your home in the future, you will have to pay tax at ordinary income tax rates from the sale or the depreciation previously taken (whichever is the lesser gain).
If you never set your home up as a self rental, you would be able to sell your home tax free.
So if everything we have said so far doesn’t really show any benefit to this scenario, when does a self rental make sense?
The only time a self rental really makes sense is if you have a legitimate business.
For example, let’s say you own a nail salon and own the building in which the nail salon operates.
It is in your benefit as the business owner and owner of the building to actually separate these two entities.
In this scenario, rent is an allowable business deduction and so is taxable rental income, so you won’t be creating any phantom income or losses as you would in the previous example.
What this will do is reduce your self employment tax liability!
Not only that, but you are also separating the business and the building which creates more liability protection.
Say the business goes bankrupt and has to close down, because the building is under an LLC (limited liability company), it is protected from also being seized in the bankruptcy.
Limited liability companies provide liability protection to its owners, so this is a great setup in this scenario.
Furthermore, if there is a lawsuit or lien against your property, they cannot come after your business because they are separate entities.
It is a win-win for both the property and the business.
As you can see, buying a house with an LLC and renting it to yourself isn’t always a going to make sense, but there are times where it can really benefit you as a business owner.
We always recommend speaking to a tax professional before setting your business and property up this way.
They can guide you in the right direction and make sure there aren’t any red flags or unnecessary liability issues in this scenario.