So let's talk home purchase... I bring this up because I have always wanted to capture depreciation on my residence.


Say I purchase a home for a million bucks. Payment is around 7k including taxes and insurance. I have some expense for upkeep. I do not get to write anything off except interest.


Now say instead of myself buying the house, I form up a LLC to purchase the house. Because interest rates are a tiny bit higher for business purchase, now the payment is 7200, again including taxes and insurance. I then rent the house to myself for $8000 a month, giving myself a little buffer for repairs and stuff. Since I own 100% of the LLC, I still own the house. In addition, I can just give the LLC to my son at my death and no probate will be needed. Still probably counts against the cap for no fed estate taxes, but it would be the same if I owned it.

So assuming all of the math works out, it is basically a wash. But if the LLC (owned by me) owns it and rents it to me, now I can depreciate 1 million divided by 27.5 each year. This money comes out of nowhere since I don't actually pay it to anyone, and now my LLC is losing money every year, which I then can write off on my taxes from other cap gains.


What am I missing here? Is this done? I could really see it being especially good in California or a state in which you don't have to ever reset your basis for prop tax reasons. Sure there is a little pain in the butt setting it all up and doing an extra tax form every year, but this is a 36k annual write off for 27 years.

You would not have a homowner tax exemption. The tax assessor would value the rental relative to the rent which would be a lot at that rent.

Not that I know anything about real estate, just what I would expect.

Homeowners exemption on property taxes is one thing to look at, along with other potential exemptions you may qualify for.

Also, check into step up in basis laws. Normally there would be a step up in basis/value upon death. Not sure how it's treated within an LLC but there could be tax consequences going the LLC route that otherwise wouldn't be there.

You'd have to report 96k in rental income by the llc. You'd also be subject to passive loss restrictions if you're not exempt (certain professions). Your accelerated depreciation would create a big cap gains issue down the road.

Also only renting to the control group and no outside parties creates an issue.

HECUBUS said:

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You would not have a homowner tax exemption. The tax assessor would value the rental relative to the rent which would be a lot at that rent.

Not that I know anything about real estate, just what I would expect.

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Homeowner exemption in Dallas or Tarrant County is 100k off your appraised value, which when multiplied by the prop tax rate doesn't really save that much, maybe 2k.

Sims said:

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You'd have to report 96k in rental income by the llc. You'd also be subject to passive loss restrictions if you're not exempt (certain professions). Your accelerated depreciation would create a big cap gains issue down the road.

Also only renting to the control group and no outside parties creates an issue.

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OK I have to think about this one.

Do you get to deduct both the mortgage payments AND the depreciation when determining rental property "income"? If so then the 96k in rental payments would be more than offset by the mortgage payment, expenses, and depreciation. If the LLC doesn't get to deduct the mortgage payment from the receipts then I now understand why this isn't done.

The second issue, the increase in basis could also be a problem. I think by selling the LLC instead of the property held by the LLC you could get around that since the day of accounting would be put off forever.


So I guess I could reword my hypothetical as follows...


When accounting for a rental property do you take the rental receipts minus the mortgage payments, minus the repairs, minus the taxes, minus the depreciation or do you not get to subtract the mortgage payments since that is "assumed" in the depreciation?

It's two diff entities. Llc gets income, depreciation, repairs, tax, insurance (assuming non nnn lease). Net for the llc becomes a k1 distribution (gain or loss) to you personally.

Your tax filing loses property tax deduction, interest deduction, and homestead eligibility. Your can't deduct lease payments on your personal filing since personal doesn't get Qual business expense.

On net you're likely either going to A)create phantom taxable income on the K1 or you're going to B) be limited by passive loss exclusion and in both cases, create a basis issue down the road

[/edit] Sorry - temporary thread hijack - started a new topic instead...

A single member LLC is disregarded. And this would just be a timing difference with recapture on the future sale.

knoxtom said:

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Sims said:

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You'd have to report 96k in rental income by the llc. You'd also be subject to passive loss restrictions if you're not exempt (certain professions). Your accelerated depreciation would create a big cap gains issue down the road.

Also only renting to the control group and no outside parties creates an issue.

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OK I have to think about this one.

Do you get to deduct both the mortgage payments AND the depreciation when determining rental property "income"? If so then the 96k in rental payments would be more than offset by the mortgage payment, expenses, and depreciation. If the LLC doesn't get to deduct the mortgage payment from the receipts then I now understand why this isn't done.

The second issue, the increase in basis could also be a problem. I think by selling the LLC instead of the property held by the LLC you could get around that since the day of accounting would be put off forever.


So I guess I could reword my hypothetical as follows...


When accounting for a rental property do you take the rental receipts minus the mortgage payments, minus the repairs, minus the taxes, minus the depreciation or do you not get to subtract the mortgage payments since that is "assumed" in the depreciation?

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Mortgage payments do no come into play. Part of the mortgage payments provide your interest deduction and if you escrow, property taxes as well (in the year the taxes are paid from escrow).

If you depreciate the house, then when it is sold it will generate income that it ordinarily would not.

Not sure if placing the house in an LLC kills your ability to exclude up to $500,000 of gain of the gain on the sale or not, which is available if the house is owned personally. Perhaps if it was a single member LLC, don't know. Another thing to look into is it now a rent property and no longer a primary residence, if so then the gain exclusion would not seem to apply.

Haven't thought through all this, but my gut tells me this type of arrangement might result in some phantom income.

If you wanted to sell it prior to death, you would lose the personal exemption of gain on sale of primary residence.