Title should read “Can an LLC own a home, and can the LLC owner live in that home?”
I assume corporations can own homes and apartments, and permit employees to live in them, or they can rent/sell them as they desire.
Can an LLC owner live in a house owned by the LLC?
If so, are there any benefits to this (tax, insurance, liability, etc)? Or would home ownership by the LLC be more expensive for the owner?
If they cannot, why not?
An LLC can own a home, and the owners of the LLC can live there. As to advantages, tax or otherwise, I have no idea.
I have a client, in fact, who set up an LLC to do some home construction, built a home intending to sell it, and moved in instead and had a residential lease between him and his company.
Presumably if the rental agreement is not at about fair market value, the IRS/Inland Revenue/local tax Nazis can deem the difference as income the owner derives from his business - and treat it the same as any other dividend. After all, the business pays/paid fair market value for the property and its maintenance. Any situation where the corporation gives away that value is a dividend. (No different than if the company made a loan to an owner at below market interest rate).
Obviously the answer is going to depend on the laws of the jurisdiction where the home is located. But I seem to recall that in the US, at any rate, there’s a capital gains tax exclusion available on the sale of the home that you own and occupy. You’d want to check whether this exclusion would still be avaialable on the sale of a home that you occupy, but that is owned not by you but by a corporation that you control.
And similar issues would arise with any other tax relief/exemption/concession that might be available to home owner/occupiers.
What we have here is a case of personal use of a business asset. Typically, a business owns a home to rent it at a profit, and my post here strictly concerns this case. Other business uses have different rules.
Simply, you cannot depreciate the home, nor write off any expenses. So, for a $250,000 home, the depreciation is a little over $9,000 a year. If the business is using it for business purposes, then that $9,000 comes off the business’ net income every year. If you’re using it as a residence, then you cannot write that off. Also, any repairs that are deductible for the business use aren’t for the personal use.
This is a common enough situation that there are quite a few IRS publications that talk about this.
My understanding is that owner occupied get a significant break on insurance. Certainly I do, barely pay nothing here compared to a rental unit.
The biggest advantage is … of course … free fucking rent !!!
I would think that just the higher property taxes on a corporate-owned home vs. an owner-occupied home would be enough to outweigh any other financial consideration.
Sounds like this is the exact scenario I am thinking of.
What happens when you sell? Is it taxed at a corporate rate (as a profit), or since it has depreciated, whatever it sells for is taxed only on what is left after depreciation is accounted for?
I know these are basic questions, but could one set this up without help, or would that take a lot of background knowledge of tax/corporate law?
Who would be the best person to speak with regarding this set up? A real estate lawyer, financial advisor, or who?
Any half-way competent tax adviser should be able to tell you the tax consequences for an LLC that owns a residence and provides the use of it, free of charge, to the individual who controls the LLC. And he should be able to contrast those consquences with the tax consequences of an individual owning and occupying his own residence.
How the two will compare is going to depend on the circumstances. Is there a mortgage on the property? Does the individual already own the property, such that he would have to transfer it to the LLC to set up this structure? Or will he just contribute cash to the LLC so that it can buy a house in the open market? If the latter, how will the contribution of cash be accounted for, and taxed? Etc, etc. And, as already pointed out, the answers will vary from jurisdiction to jurisdiction.
I’m guess that, in most real-world scenarios, direct ownership of the home works out best. Otherwise, ownership of homes through LLCs would be commonplace.
A lot of the rich people I know have something called a family trust, and their homes are owned by their family trust.
One of these people is a tax attorney and his wife is a real estate broker, so I assume between them they’re quite aware of the tax consequences, and this is how they do it. I also assume the other rich people who do this have good counsel, and that this is the way to go if you have a lot of money you want to protect.
In Colorado so YMMV.
If you have a home office it can work out (depending on your exact local laws of course). At least in Australia this is legal as long as you charge a fair market value for the rent to yourself. So the company can own the home, you work out the percentage of the home which is business related, and charge rent on the remainder. One big advantage is that any expenses on the home (repairs, renovations etc) are tax deductible (since it’s an investment for the company), and the interest paid on the loan is also a tax deduction for the company. To do it strictly legal your company need to pay you a salary, then you pay rent back to the company for the section of the house which is personal use. Whether or not you come out ahead or not is something you pay experts in local tax law to work out for you.
Thank you for this answer.
I wonder…
Why wouldn’t everyone want to protect their money, no matter how much it is? What are the barriers to entry to this world? For those without law degrees or family money, how do you get this information?
Is it just a matter of paying the right people the right money? I suspect this is all it boils down to.
I wonder if legalzoom would provide the documents to place their homes in a trust, and protect it. I can’t imagine anyone does this because it doesn’t help them keep their wealth. What kind of money would one need to actually join this world?
I would guess you are spot on. One would need a good accountant and/or tax attorney who would have to crunch the numbers to see if it was a worthwhile move.
I am starting to like the trust idea!
Yes essentially it is. It might as an example, cost $10-$20,000 in legal fees to set up the trust and then $4000 a year in ongoing legal and accounting costs, so it’s just not worth it for most people. The threshold for what level of assets makes it worth while to take measures like this will depend on local laws. Google “wealth protection consultants” + your local state name and there are many many companies that specialise in this, of course many of them are dodgy so buyer beware.
Accounting 101 - if your company buys a house for $500,000 and depreciate it every year so that when it’s ready to sell, it’s written off $200,000 - then it’s carried on the books at $300K now, and any proceeds over that are taxed as capital gains… Whereas as a personal home, anything over $500K would be capital gains, plus as mentioned, Americans have a capital gains exemption for some/all of a personal dwelling.
There’s still the problem that for a company transferring money or similar consideration (i.e. free or below market rate rent) to a shareholder, it will be considered a dividend or capital withdrawal and taxed as such.
As I understand it, a family trust is a way for an entity to continue to exist - like a company - without being tied to one person’s lifetime. However, the rules about what it can and can’t do and the reporting requirements mean the entry level is when the tax savings are high enough that paying the lawyers and accountants’ fees to manage it still saves money.
The purpose of a family trust is not to “protect” money - you’re still responsible for all the same real estate taxes, mortgage (if there is one), capital gains tax (if you sell and the property is not exempt) and so on. The trust is there primarily for making it easy to transfer the property to your heirs (who will be made co-trustees) upon your death without having to go through probate. And no, this does not magically avoid estate taxes.
Trusts are bespoke entities and not really the kind of thing you should do with generic forms via legalzoom. But any local wills/estate lawyer can set one up for a few hunnert bucks. This is not billionaire territory.
I’m glad you asked …
I hope you understand that things wear out, and depreciation is how we account for the diminished value of an asset as it wears out. Although you paid $250,000 for the house, it’s only worth $241,000 after the first year, $232,000 after the second etc etc etc until after 27-1/2 years it’s completely wore out, worth nothing.
Let’s suppose you sell the house after ten years. The value of this house is now $160,000. When the business goes to calculate the capital gains, it’ll have to use the $160,000 number for the capital, all money above that is capital gains. See IRS Pub 534 “Depreciation” and IRS Pub 551 “Basis of Assets”.
You’ve removed this property from the business for Personal use … thus you cannot depreciate it. Therefore after 10 years you can use the original $250,000 as your capital, and only the money above that is your capital gains.
How these capital gains are taxed depends on your individual situation, but in general if you own the property yourself (not through the LLC), then you wouldn’t pay any taxes in the above scenario.
Contact a CPA, there’s some “catches” here that are just too complicated to go into here over the internet, like splitting the building asset and land asset up (you can never depreciate land).
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I think the comment upthread about property taxes it local … here the property taxes are based strictly on land use … if it’s a single family residential property, it’s taxes as such without consideration as to the legal entity that owns it.
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Finally, unless you’re a One Percenter, you should be better off owning the home in your own name or trust … letting your LLC own it is just an expensive complication that won’t save you anything … but that’s strictly IMEIO
crypto, in a way you’re asking the question backward. Yes, an LLC can own a house, but you pretty much have to start this kind of question with what you want to achieve and then see if an LLC is the solution. You don’t decide on the LLC and then see what benefits you can get because the benefits largely depend on how you operate.
So, one example: some people put houses (especially rentals) into an LLC so that if someone is injured on the property, the owner limits their liability for the injury to the value of the house. As a passive owner of the LLC, you do indeed get limited liability. However, if you are personally involved in running the property or making repairs, then you may have personal liability as an individual, not just as an LLC owner. So the mere existence of an LLC means nothing; it is a combination of LLC and methods of operation that would achieve one possible benefit.
Since some benefits are mutually exclusive, it would be impossible to list every possible use/benefit/cost of an LLC owning a house.
The better way to approach it is to ask a professional questions like “How do I simplify inheritance? How do I transfer ownership of assets to avoid estate tax? How do I limit my liability? How do I maximize home office deductions? How can I minimize property tax?” The LLC may or may not be a good solution for these things.
This is new ground for me. I didn’t think there was a “get out of paying any tax” card, but it must provide some financial benefits or a trust wouldn’t be necessary. Thank you for explaining this.
This was very helpful, thank you.
You are correct. I am asking the question backwards.
My original question came from something I read. I wasn’t aware that a private home could be incorporated into an LLC, and wondered if there were advantages to doing this. I can understand from a liability POV that an LLC may make sense if one owns rental properties… That would protect the owner of the rentals from exposing his own home to any litigation settlements.
I knew I should have gone to law school. :smack: :smack:
A basic trust can be set up for far, far less than this. Family trusts are bread and butter for small-town general-practice lawyers. Most of their clients are not super wealthy. An example might be someone who wants to set up a trust to hold money for their grandkids until the kids turn 30. Such a trust might contain only $30,000 or something, but could be set up by a lawyer for a small fee, with a custodian (usually a local bank) charging a small percentage to hold and invest the assets between the time Grandpa dies and the last kid turns 30.