If you have owned a house for at least 5 years and lived in it at least 2 of those years, you can sell it without paying taxes on the equity. (Yes I know that is oversimplifying it)
But for whatever reason, I decide that I want an LLC to own my home. It is an S-Corp and no fraudulent attempt. I am the sole owner of the LLC. Let’s say I want to be protected if some burgler trips, breaks his leg and sues me as the homeowner for $42,000,003.19
Would I still meet the requirement of “owning the home” when I sell it?
I don’t have any insight into the tax question, but an LLC and an S-Corp are not interchangeable. I don’t know if that will impact the question, but you might have to clarify between the two to get an answer.
Sorry got distracted while typing.
Let’s say any corporation I own exclusively but that raises an excellent point: would having it be an LLC or an S-Corp make a difference?
The home sale tax exclusion is designed to foster home ownership by couples and individuals, so you have to be a natural person (or a pair of married ones) to claim it.
Incidentally, creating a corporation solely to shield yourself from personal liability doesn’t work. If the corporation is just your alter ego courts will pierce the corporate veil to reach your other assets.
Don’t know the answer, but we discovered that if you take x% of your house as a home office, that percentage of the increase in value is not exempt from taxes.
You wouldn’t ever pay tax on the equity. You would potentially owe tax on your capital gain (the amount your net sales proceeds exceeds your tax basis in the house).
Sec 121 provides a $500,000 exclusion (half for singles) on a home used as a residence for at least 2 out of the last 5 years.
The LLC/SCorp part makes a vital difference.
An LLC taxed as a disregarded entity still gets Sec 121 because the LLC is disregarded for IRS purposes. (It may or may not provide the liability protection you’re envisioning; see a lawyer about that).
An LLC taxed as a corporation will not get Sec 121 treatment, because corporations do not have residences. In fact, if you transfer a house into a corporation, you might pay tax even if you don’t sell it; merely transferring the house out of the LLC name into the owner’s name will be taxed like you sold it at the current FMV. This is why so many people will tell you to never put real property in a corporation. (Electing S corporation status for the LLC will make no difference regarding liabilities.)
For this purpose, it makes no real difference whether you have a “natural” corporation or an LLC that has elected taxation as a corporation. It doesn’t even matter whether it’s a C or an S corporation status that you elect.