Property ownership, rentals, corporations and the IRS

Factual Questions
1

Sooooo many questions. Some may be GD material.

I own a home and am planning to move in 18 months. That means I will be able to sell my house and take the equity tax-free. I figure that would be $30,000. Now I’m looking at it as a no-brainer to keep it and rent it out. Thing is that it was so crappily built that within the next 10 years it will need some major work like a roof. Is there any financial (GQ) reason I shouldn’t make the house a rental and instead take my $15,000 (half of 30k) and look for other real estate investments considering I now lose the tax-free benefits of the $30,000 if I move and don’t sell the house?

So my thought was to take my property tax liens and the house (if it becomes a rental) and have it under an LLC*. If I sell the house to the LLC, can I get the profit tax-free or would the IRS nail that as fraud?

  • The house would be a separate LLC owned by the first one.

I know that if you make an investment and sell it then you pay tax on the capital gains. Clearly with real estate I might be long term but what if I start flipping houses? I make a $40,000 profit on a house I still owe (short-term capital gains) tax on the $40,000 even if I reinvest it in a new house. So at any point should I consider a Class C corporation?

I am assuming for full tax benefits then I should make all of my real estate produce active income. The 750 hours in the real estate market is not a big problem since I have summers off and could take the tests as necessary to be a realtor. Do I lose all of the benefits of active income if I use a property management company instead of personally dealing with my rental? Does all of the corporate shielding affect active income at all.

If I have a rental under a class S corp and decide to put it in my name as owner to owner-occupy-live in, is there anything special I need to do IRS-wise?
More questions as I think of them. Like just thought of - when will mortgage companies start looking at my parent LLC’s credit and not my personal credit when borrowing for the next deal?

2

The relevant material is in IRS Pub 550 (Investment Income and Expenses (Including Capital Gains and Losses)).

Could you explain where the $30,000 number comes from … is that the sale price or the capital gains? Either way I don’t see how spending the money to incorporate will save you much of anything, especially if you’ve lived in the house two of the previous five years.

Rentals … check the market, what would your house rent for? … check with your insurance agent, if they can’t write the policy, you risk paying the tenant’s hospital bills out of your own pocket (not to mention your house burned down and it’s not covered) … know the Law and follow it to the letter, in my experience courts are on the tenant’s side in every case … are you competent in all phases of maintenance and repairs, hiring that work out gets expensive in a hurry. My advise is that if you want to run a rental business, you should be able to make money; if you just run it as a hobby, then it will cost you money.

3

I suggest a class in real estate wheeling & dealing. Lenders treat owner occupied and rental property very differently. So do insurance companies.

There are a lot of things that you can learn in a class or discover the hard way on your own.

4

I work in residential lending, not commercial lending. One thing I do know, may or may not be helpful, is that once you have an ownership interest in more than 6 properties (whether they are owned by you personally or by your LLC), you can no longer qualify for a residential mortgage on anything.