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I'm going to rehab a condo over a 2 month period and live in it for an extended amount of time (~5yrs) before moving on to buy a separate home. What's the best way to structure this if I also plan on renting the condo when I move out? For instance, if I'm paying cash for the condo, can I deed it under the name of an LLC I create? My reasoning behind this is for the rehab costs to show a loss to offset future income and asset protection later?
Would anything change (if there was problems with the initial situation above) If I rented one of the rooms while living in the condo?
Edit: I'll gladly read any articles regarding this type of situation if you can link me.
Last edited by Honestmike; 09-28-2011 at 08:07 AM..
Thanks for the reply. I understand people view rental real estate differently regarding asset protection (i.e. LLC vs loads of insurance). I think you make a valid point; I have to consider the alternatives to an LLC rather than assuming a LLC is the correct choice.
With the LLC, not sure if I could pay rent (substantially below market, how about $1) the LLC in order to get the tax benefit of a rental (e.g. depreciation, improvements). In any case, the rehab will be large.. I plan on holding this property throughout my life so the basis increase (if held personally) would only help if I sold it. In the case of an LLC, if it qualifies as a complete rental, I could amortize all of the improvements. I'm not sure of the "deductibility" of the improvement costs after the 5 years mark, that is, when I move out and actually rent it. Perhaps there would be some sort of proration for the years of personal use.
Basically I'm trying to get the full tax advantage of the repairs/improvements so I can offset future income. $50,000 in improvements, for example, would offset $50,000 in future rent. An attorney is definitely needed haha! Hopefully my proposed business transaction would be considered tax avoidance rather than evasion! Hmm even an abusive tax shelter.. CPA & Attorney needed.
Last edited by Honestmike; 09-28-2011 at 10:10 AM..
You're forming an LLC with you, and possibly your family members as Members.
You're renting the home to yourself for $1.00 or some small amount in order to create a tax loss.
If I understand the scenario correctly, then it could be considered tax fraud.
Consider this:
It could also be mortgage fraud, and insurance fraud.
For a mortgage, you must declare if it will be a personal residence, or an investment property.
The mortgage will be in your name and possibly you and your spouse. You probably won't be able to get a mortgage through your LLC name.
You're living in it, so you're an owner/occupant.
You're renting it from yourself, so you're a tenant
You own it (through your LLC) and are renting out, so it's an investment property.
What do you tell the mortgage company? Will they give you a mortgage if you declare all of that?
If you lie on the application then it may be considered mortgage fraud.
Insurance:
If you're an owner/occupant then you have Homeowners Insurance.
If you're renting the home out, then the renter (you) should have Renters Insurance, and
the Owner/Landlord (you) should have Landlord insurance.
If you're the owner and live in the house, and renting to yourself, which insurance do you buy?
Will you be covered if the insurance company determines later that you had a Landlord policy, but were really an owner occupant, or had a Homeowners policy but were really a landlord and a tenant, and didn't have that coverage.
By all means, contact a tax attorney before getting into this situation.
It wouldn't really make sense to do this if you're living in it. Declare it as your primary for the title when you buy, live in it at least two years then rent it. If you sell it within the following three you won't pay capital gains.
It wouldn't really make sense to do this if you're living in it. Declare it as your primary for the title when you buy, live in it at least two years then rent it. If you sell it within the following three you won't pay capital gains.
Just trying to think of a crafty way to work this.
Anyways, apparently this property is in receivership.. I'm not quite sure what this process entails but I dig some digging through public records and found a laundry list of problems from liens, lawsuits, bankruptcy filings, multiple mortgages/home equity loans, and the final notice (putting it into receivership) because it was a health hazard to the community. HAHA!
This is one of three condos in the property. From the court documents, it's pretty clear that no one is living there. Should I assume that the other two will go up for sale?
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