Never rent your home to yourself through your LLC. You can buy a house with a limited liability corporation (LLC) and rent it to yourself, but it will not get you the tax benefit you want. In fact, it is a bad idea in most cases. This is another scheme to avoid taxes, and the Internal Revenue Service (IRS) has seen it and dealt with it.
- You can rent property from your company, but in most cases, it is not a good idea.
- You can live in a house that your LLC owns, but you should not do it to avoid taxes.
- A single member LLC can pay rent to itself, and it is called a self-rental.
There are legitimate cases where an individual owns commercial property and rents it to their own business, not a personal residence. The company can separate the property from the business for liability purposes. Generally, though, if there is not a good reason, the IRS will not allow it.
Can I Rent Property from My Company?
You can rent property from your company. There is no law against it. Indeed, some people may have personal reasons that make it advantageous for them to do that. However, the IRS has worked hard to make it very difficult to get tax relief from renting your home from your company.
It can, in fact, lead to serious problems if you rent your primary residence from your company. Aside from generating phantom profits or non-deductible losses, you will reduce your home’s tax basis if you depreciate. When you sell your house, you will pay ordinary income tax on the lesser of the gain from the sale or the depreciation you already took. Without the LLC you will be able to sell your home tax-free in most cases.1
Can I Live in a House My LLC Owns?
You can live in a house owned by your LLC. There is no law against that, but it is not a good idea to have your LLC own your primary residence. An LLC protects you, as an individual, from liability issues associated with your business. On the other hand, the government encourages private homeownership by individuals and families. These advantages include:
- You will not qualify for a homestead exemption, if your state has that.
- The IRS offers a primary residence exemption for capital gains when you sell your home that your LLC will not qualify for.
- You must make a higher down payment and pay higher interest rates for the mortgage.
- Local and state tax are different for individuals than corporations. It is likely that you will pay more property and income taxes depending on where you live.
Finally, if you have your primary residence under the same LLC as you do all your other business, then you lose the asset protection between them. Protecting your home is one of the main reasons you set up the LLC in the first place.2
Can a Single Member LLC Pay Rent to Itself?
It is possible for a single-member LLC to pay rent to itself. It is called a self-rental and, in most cases, this is not a good strategy to avoid taxes. The IRS has seen this scheme and structured the tax code to prevent it. However, there are situations where it makes sense for commercial investments.
Is a Self-Rental Passive Income?
The IRS treats self-rental income as non-passive. How does this affect your taxes? In the case of a self-rental for your home, It means you create phantom income. Here is how:
- The rent you pay to your LLC is not a deduction on your personal income taxes.
- Your rent is income for your LLC.
- If you do not have enough non-passive expenses to offset the rent, then you create phantom income for your LLC.
It is important to remember that in most cases the IRS treats income as non-passive if the owner has a material interest in the operation. In other words, the income is non-passive if they actively work in the business. The owner is passive if they do not handle the day-to-day management of the business.
In almost all cases, the IRS treats income from real estate investments as passive, but not in this case. It is an exception. The reason they make this exception is so that people will not rent to themselves to avoid taxes.1
Is a Self-Rental Passive Loss
What if you have enough non-passive losses to offset the rental income you pay to your LLC? The IRS does view losses from a self-rental passive. If you do not have other passive income to offset those losses, then:
- Those losses are non-deductible on current year taxes.
- Even if you do have other passive income to offset the losses, the IRS has special rules that prevent you from benefiting.
In this case, you still cannot use your rent as a tax deduction on your personal taxes, and your LLC will incur nondeductible losses. Again, there is no benefit.3
Final Thoughts on Why You Should Never Rent Your Home to Yourself through yYour LLC
You should never rent your home to yourself through your LLC. When the IRS changed the standard deduction limit, many people started looking for creative ways to get a deduction for their houses. One such scheme is to set up an LLC to own the property and then pay rent to the company. The IRS clamped down on this so that this strategy does not make sense today.
While self-rentals do not make sense for a primary residence, there are some cases where it makes sense for businesses. The key issue is a liability. If you can show the IRS that there is a practical reason for the self-rental besides tax avoidance, then they will allow it. The most common way to accomplish this is to show that you can separate and reduce liability.