Residence in LLC

[GeorgeK76]

Client created the LLC (single member) for their rental property. That's an easy schedule E, no problem. Now they've put their own house in the LLC because they want to deduct all the expenses like insurance, repairs, plus mortgage interest and taxes, so they starting paying rent to the LLC. I think this is nuts.

As I see it they have none of those deductions for the residence (unless they take taxes and interest on sch A)  and they are generating taxable income to their own LLC from their own money plus losing the 121 exclusion if they sell.

Am I missing something?

[IRonMaN]

"I think this is nuts."

Yeah, you are right.  Their plan is nuts and for them to come up with the plan they gotta be a little nuts.  Have you seriously thought about sending them somewhere else to drive another preparer nuts?

[Taxtime3]

Good lord.  That's all I can say.  A revocable living trust would make more sense.

[Just-Lisa-Now-]

TikTok strikes again!   

So many bogus tax scam videos out there, people need to stop using it for real information and use it for entertainment only.

[abctax55]

paging @BobKamman  😉

[IRonMaN]

Bob needs a little break today.

[BobKamman]

How is cheating with a revocable living trust different from cheating with an LLC?

But what if they put their house into an irrevocable trust, for which they are not beneficiaries?  Why use a trust, why not just give it to the kids?  And then hope the kids don't evict them.  Or run over a wealthy lawyer and get sued for all they're worth, including Mom and Dad's house.

[Skylane]

If they actually did re-title the house into the same LLC as their rental property, they should have a conversation with their insurance company or agent.  

Changing the ownership of the house into the LLC would require a change to their homeowners policy.....  Their homeowner policy would have been written with their individual names as Named Insured is likely worthless... (that means if the place burns down, they could be SOL)... 

Because the LLC contains multiple properties it would not be eligible for most HO insurance companies. 

[Taxtime3]

I was only thinking from an estate planning perspective but not all the rental whoha.  Sorry I did not clarify and you could not read my mind. 

[GeorgeK76]

Thanks to you and everyone for confirming my thoughts. Let me summarize what I believe gets reported:

1. rental income and expenses for the property rented to someone else is a sch E entry.

2. The residence also goes on E (only to split the taxes and mtg interest) with zero depreciation and no deductible losses. 100% personal use. Or just report half of these on column 1?

He tells me he's paying rent to the LLC for his residence, essentially paying himself. Can I ignore this entirely or do I need to show it somewhere, like a sch C? 2nd E entry? It's not FMV.

And yes he needs to speak with a lawyer about undoing this mess but I need to file this for 2023 first.

Thanks for any help guys.

[sjrcpa]

If it's a SMLLC disregarded for tax purposes, the personal residence remains a personal residence for tax purposes. No Schedule E for it. 

Deductions for RE tax and mortgage interest go on Schedule A subject to the usual limits.

[GeorgeK76]

Agreed.

Both properties are on one tax bill and one mortgage - I would take half on E and half on A, yes?

What, if anything, do I do with the self-rental income? Former preparer put this on C but I think that's wrong.

[George4Tacks]

@GeorgeK76 Is there something more to learn/share? What occupation is this taxpayer? Is one of them self employed and running a legitimate business out of some portion of the home? So many questions. How to ask them. This is a hard job. People are very interesting. 

[sjrcpa]

"What, if anything, do I do with the self-rental income? "

Nothing. It is Disregarded.

Yes 1/2 Schedule E rental and 1/2 Schedule A.

So you're saying this is actually one property, a duplex?

[GeorgeK76]

No, not a duplex. Two houses on adjoining lots. Both lots titled to LLC.

And no business purpose in either place,  just collecting rent.

I agree with everything posted so far, and will advise him to see a lawyer about undoing this. I'm not looking forward to the conversation where I tell him his former preparer (deceased) has been reporting this all wrong for years. His tax bill will go up and I'm the bad guy. Great start for a new client - ugh!

[sjrcpa]

It doesn't really need to be undone, although that's not a bad idea. It does need to be reported correctly for tax purposes.

I can see how you have a mortgage covering 2 or more properties. How do you get one tax bill for 2 properties though?

[GeorgeK76]

The lots were combined into one. One lot with 2 homes on it.

[sjrcpa]

Then it's one lot now.

[BobKamman]

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@sjrcpa wrote:

It doesn't really need to be undone, although that's not a bad idea. It does need to be reported correctly for tax purposes.

I can see how you have a mortgage covering 2 or more properties. How do you get one tax bill for 2 properties though?

---

If it's not undone, will it still qualify for the exclusion of gain on primary residence?  Probably, if looking at substance over form, but I wouldn't want to be the one having to defend that. 

And where did someone come up with the idea of just splitting everything 50/50 between Schedule E and Schedule A?  Weren't these two properties bought at different times for different amounts?  Were there originally two mortgages, refinanced into one?  If the home cost $450K and the rental cost $150K, a 75%/25% split would be indicated. 

I'm waiting now for the additional fact that the rental house is occupied by the daughter and grandkids.  Who buys the house next door as a rental, other than helicopter parents?  At least that is what I have seen more than once.  

[Skylane]

Okay, so it sounds like the attorney combined the 2 adjacent lots and 2 dwellings on one RE lot with 2 dwellings. Everything is deeded to the LLC.

No real income tax benefit to that... IMO, it just means if you want to sell the houses, you have to sell them both together...

They still ought to have a conversation with their insurance agent or company (if they haven't already) to make sure that the policies are correctly written, or to have them rewritten.

They don't necessarily have to undo what they did.... they just won't get the tax benefit that was anticipated....

[sjrcpa]

Valid points @BobKamman.

"Who buys the house next door as a rental, other than helicopter parents? " 

The first rental property I bought was the house next door to me at the time. Both houses shared a driveway and the neighbors gave me first digs dibs when they were selling.

[BobKamman]

@sjrcpa Wanna buy a consonant?  The word is "dibs."

[sjrcpa]

I know that. I can't type.