Client buys new primary residence and puts it into an LLC. He lives in the home. What to do with the mortgage int and property taxes? Add to Sch A, or Sch E or Sch C?

[lw06880]

Client bought new primary residence in NY in Jan 2021 and established LLC to hold the property. Did not rent it out at all, lived in it 11 months of the year. What does he do with the mortgage int and property taxes? As expenses of the LLC I am assuming they can not be used as an itemized deduction. Or do we disregard the LLC and add to Sch A? Also assuming they can’t be expensed on Sch E as there was no income.  What to do?

[qbteachmt]

Ha ha ha. Someone has been taking Real Estate Investment classes. Does this person realize everything they are giving up? The exclusion on capital gains, any homeowner tax credits that might apply Fed and State. Does their lender know, or is the mortgage still in their personal name? Does their insurer know? Are they renting out any spaces? Is this a residential property?

What are they trying to do? Is this a case of bad guidance?

Without more details or that there is a Business Reason for this, and that this is one person thinking they can pass the expenses to a business filing...

"If you're doing something convoluted specifically just to avoid personal taxes that you would otherwise owe, that's generally going to be seen as a tax scheme, and that's illegal. That's why it's not worth sitting around coming up with schemes like this."

https://paladinilaw.com/substance-over-form/#:~:text=The%20substance%20over%20form%20doctrine%20allo...

[IRonMaN]

I'll ask the question everybody wants to ask - why did he put it into an LLC?

[qbteachmt]

OMG:

Put it in the LLC? Or did the LLC buy it?

Because "put it" in the LLC would be Transfer of ownership.

[lw06880]

Have not asked yet to the rationale behind this move, or which came first the LLC or the home purchase.  The LLC was set up to hold this property.  I know there are plans to rent it out in the future as an occational holiday let.  Question for 2021 is what can be done with the mortgage int and property taxes?

[jeffmcpa2010]

Regardless of everything / anything else. Single owner LLC's are disregarded entities per the IRS. 

https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-compan...

LLC for Business is on a Schedule C

LLC for Farm is on a Schedule F

I see no reason to think that anything would be different for personal property in an LLC. Disregarded for tax purposes, and just report everything as though the LLC did not exist.

[lw06880]

Thanks.  If I report as if no LLC then do these will go into Sch A, with property tax restricted to $10K?  If I report as an LLC then they go to Sch C, with no property tax restriction?  But given the expenses are related to real estate to they go in Sch E, but then no passive loss allowed?  

[qbteachmt]

"If I report as an LLC"

You are treating this as Single-Member LLC? There is no business purpose here.

If there is no Rental income, and no intent for operating for rental income (because it is residential and occupied for free), there is no write off of expenses for the LLC (even as disregarded); not on Sched C or E. You cannot have the intent to write off LLC Costs without the intent to generate income with those expenses.

And they have forfeited a lot of ownership benefits, including capital gains exclusion. You cannot pretend the LLC doesn't own the house, if it does.

[jeffmcpa2010 · Accepted solution]

The original premise was "personal use property" Not "Business Property" or "Rental Property".

Schedule C and E would be out in that case.

[jeffmcpa2010]

If the LLC is a disregarded entity, I am not sure they have forfeited any tax benefits. particularly capital gains exclusion. But to determine that would take an amount of research I am not investing just out of curiosity.

[jeffmcpa2010]

I have heard there is an Estate (Probate) (Probably depends on the state's involved) reason to have real property not in your home state in some kind of entity such as an LLC or Living Trust, but other than that it makes no sense. And in this case, it is now his home state of residence so that reasoning doesn't help.

[qbteachmt]

"to have real property not in your home state"

In this case, the person is living in that property, though. The Real Estate "classes" are so bogus, it really is sad. Without understanding what they want to accomplish, it's hard to help. It's hard if there should be a Trust, instead of this concept. Of course, they might be in a State that allows for Transfer on Death, and don't need a Trust. Or, they don't understand that living in the LLC property has pretty much legally (risk-related) pierced the LLC protection they might have thought they would gain.

And yes, my State happens to be the place to register your RV/Motorhome to your LLC. Just ask Rick Perry's campaign bus about it. Montana was featured on Sunday Morning (CBS) this past Sunday as a State where you can be legally married by proxy = neither party needs to be present nor a resident of Montana.

Things get weird.

[Accountant-Man]

I bet the teacher of the real estate "course" made a few bucks, and the attorney who set up the LLC made a few bucks,...