House to LLC

[Molar Mechanic]

Given the new SALT limit of 10k, would it be possible to move our house to an LLC, then rent it from ourselves?  That would allow the LLC to pay the property taxes as a business expense and free that money under the 10k cap for the state income tax deduction.  I'm sure there is a flaw there, and I'll get with "my guy" next week.  Thoughts?

[jfoxcpacfp]

Molar Mechanic wrote:

Given the new SALT limit of 10k, would it be possible to move our house to an LLC, then rent it from ourselves?  That would allow the LLC to pay the property taxes as a business expense and free that money under the 10k cap for the state income tax deduction.  I’m sure there is a flaw there, and I’ll get with “my guy” next week.  Thoughts?

Click to expand...

So you want to convert your residence to business property and give up any long-term capital gains exclusion? And pay rent to yourself so you can pay tax on the rental income? Those are a couple of the flaws that I see.

[Molar Mechanic]

I figured it was probably a non-starter, but how does this math check out?

Just to complete the thought experiment...depreciation saves tax at 37% (tax assessed value ~622,000 divided by 27.5 = 22,000 deduction), long term capital gains taxed at 23.8% or less.  Allows write-off of all repairs and remodeling expense.  Market rent for my house would be similar to or less than mortgage payment, and able to deduct the loss if it was set below.  In addition, repairs and remodeling could be immediately written off as well.

Allows for ~$29k in deductions annually($7k property tax + 22,000 in depreciation), for a tax savings of 42.5% (37% + 5.5% State tax)  = 12,200 in tax savings annually, potentially more  if the house loses money or has significant upkeep expenses.  Fifteen years of that saves 183,000 in taxes with no operating loss and potentially more with maintenance and other expenses deducted.

The exclusion for home gains is $500k per married couple, so that is the max that could be saved from future capital gains tax, and the depreciated amount would be recaptured.  After 15 years, that leaves $330,000 depreciated, and as much as $500,000 to pay gains on, for a worst case total of $830,000 to pay tax at 20% (LTCG tax) or 23.8% with ACA of $166,000 ($197,500 with ACA) in LTCG tax paid. That tax is also paid in 2032 dollars, while the tax saved is in 2018-2031 dollars and can be invested and grow.  If sold after retirement, then the LTCG could be 15% ($124,500) or even less.

Also considering we have to live somewhere if we move in 15 years, then the option exists for a 1031 exchange to avoid the capital gains tax.

I recognize this would not have made sense under previous tax codes, but does it now?  Also possible that these deductions return after 8 years, and the house is then re-sold from the LLC back to ourselves, and tax is paid then, and I'm not sure how the math works out.

Still a no go, or worth further exploration?

[Molar Mechanic]

So I was thinking through this on my run yesterday, and I think the fatal flaw is that paying rent is moving post tax money to pretax money, which is now offset by the deductions, but in the end, leaving us no better off than we started.

This is why I stick to teeth and trust the professionals when it comes to tax.

[jfoxcpacfp]

I would say you're on the right track. Apologies for not going through your math, but between work, Christmas, and Chinese spammers, I just didn't have the spare time at the moment