#Rent #it #company
Rent it company
Can you rent your house to yourself? Let me explain.
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?
Alexander Felice (Moderator) –
I don’t see any benefit.
sure you can make a lease to yourself and rent it, but what do you gain?
Same things that you do on any rental property, depreciation, write-off expenses, mortgage interest write-offs, etc.
Easier to incorporate into my portfolio since thats where its headed anyway? Why do the work twice if i know I want it as a rental unit in 2-3 years?
What are the benefits from owning it outright personally compared against the benefits listed above?
Are you able to get financing from a lender if the property is owned in a company?
Money isnt the problem, in fact it will be easier for me to finance through the business side than my personal side.
I am most interested in benefits pro or con. I am not as familiar with the benefits to owning the home as regular person. I know the good stuff from the business side though and those benefits seem enough to me to warrant doing it this way.
PLUS it obviously builds my business up and accomplishes the same goals in wealth building.
So can someone elaborate more on what a $200,000 property would like to the IRS in terms of personal vs business? Like Top 3 benefits for each side?
For instance: Business Property
As far as the 121 exemption, I am unfamiliar? Care to divulge further detail?
You get all the same depreciation, etc. regardless of how you own it, when you rent it out to someone else. If you rent it to yourself while you live in it, you then have Created taxable income to your company (with the rents you paying yourself) that you’ll have to pay taxes on, totally unnecessarily.
Let me also state that this would be the quickest path to ownership on this property for my particular situation, personal finances dont stack up well, but my business has had the good fortune of being in some great relationships with a couple banks and private investors.
You will want to work that out with your business/tax attorney. Celebrities do it, and even use it in their stand-up material (Gallagher – “The Bookkeeper”, for example). I’m sure there are a LOT of I’s to dot and T’s to cross, however.
Sec. 121 – live in a property you own for two out of the previous 5 year period and you can receive the first 250K (500K if married) in profit tax free (depreciation not taken so not a factor)
Sec. 1031 – Sell an investment property replace it with more investment property and defer all tax (not eliminate) including depreciation
Tax free is a pretty big trump card to have. And in your case you could live in it for 2 and then rent it out for three and still get the 121 exemption while simultaneously 1031ing any excess over the 121 limits.
@Trey McGovern what is your entity structure? Can you share rough numbers?
You can rent to yourself but the benefits of doing so may depend on what your entity structure looks like.
Russell Brazil (Moderator) –
You will miss out on the greatest tax break available to the american public, the $500,000 exemption from capital gains on a primary residence sale.
James Mc Ree
You might want to check with a tax attorney if you think you’ve found a pot of gold. Try Googling “rent house to myself”:
Short answer from several CPA-claiming posters: No. It is called self-dealing. I didn’t read a lot of the search results. Maybe there are some favorable ways of doing it that don’t land you in jail.
Joe Splitrock (Moderator) –
@Trey McGovern If this was allowed, everyone would just rent their house back to themselves at a loss. We could take all repairs, lawn care, utilities and insurance as an expense. The problem is you cannot claim expenses from your personal residence as a tax write off. You cannot take a loss on your primary residence through depreciation. Mortgage interest is deductible on your personal residence, so nothing to gain there. You are asking people to lay out the pros and cons, but I don’t see the pros. Cons are that you end up paying more taxes and could find yourself in a questionable situation.
Talk to an accountant about your specific situation. Maybe there is some special situation that will work for you given your business. You are the first person I have heard with this great idea, which leads me to believe it is not as good as you think.
@Brandon Hall These rules will basically make it difficult for you to claim the net taxable loss (if any) caused by your self-rental.
>>> Im not concerned with creating or fabricating losses to reduce my liabilities, and I would certainly follow all the rules. I am curious if this efffects the depreciation value though. If that is what technically makes you have a loss, is that not considered? Or would certain things be considered separately? Like depreciation? would it be allowed? Interest on mortgage?
@Russell Brazil You will miss out on the greatest tax break available to the american public, the $500,000 exemption from capital gains on a primary residence sale.
>>> 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?
@Joe Splitrock If this was allowed, everyone would just rent their house back to themselves at a loss. We could take all repairs, lawn care, utilities and insurance as an expense. The problem is you cannot claim expenses from your personal residence as a tax write off. You cannot take a loss on your primary residence through depreciation.
>>> So even if it was structured, run, and documented like a legitimate business model as if I was renting to any old John Smith out there, I couldnt make any of these deductions and it would still be considered as my primary residence and disregarded as a business holding. Even though it has current history for 5+ years as being a rental property, and it would be held under my rental company next, with intentions of it being such a property, with me being the tenant for the first 1-3 years of ownership, it would not be regarded as such?
You are the first person I have heard with this great idea, which leads me to believe it is not as good as you think.
>>> Bit harsh, dont ya think? Im six months into this and trying to figure out best practices and strategy, so I dont know that its kookie, and I certainly dont think it ever hurts to ask questions and learn why it is, or may not be, the best practice.
And I certainly hope you dont believe that just because YOU personally havent experienced something first hand that it makes it invalid or somehow less deserving of discussion.