Will there be a taxable event if I quit claiming the deed on my LLC?
We have an LLC for our rental property. We are purchasing a house and need to finance it. [/quote]
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While I commend you for thinking about the tax consequences of home ownership before you sign on the dotted line, I would advise you to move cautiously. This is a complex issue with some potentially hefty consequences, so be sure you consult with a tax professional and an attorney before making any decisions.
To answer your immediate question, the actual transaction of quit claiming the deed to your LLC should not trigger a taxable event. That being said, this move may cost you thousands in tax savings and unnecessarily complicate your tax situation.
The first thing to consider is that this move may cause the IRS to scrutinize both your personal finances and your LLC’s finances. The IRS may think you are hiding assets or inappropriately reporting information.
Essentially, you are transferring a personal asset to your business, but the property will not be used for the business, nor is it an investment. The IRS has a long history of challenging non-traditional asset transfers. Even if everything you do is legal and ethical, the IRS can tie you up in audits and red tape.
Next, you need to understand that by quit claiming the home to your LLC, only the title or deed to your home is altered. The mortgage agreement should not change--you are still personally responsible for the mortgage payments.
Since you are still the mortgage holder, you should be entitled to deduct mortgage interest from your personal income taxes. However, once you sign over the property, you may find that getting a home equity loan or refinancing your mortgage will become very difficult. Once the LLC is the official titleholder, lenders will likely view the home as an investment property, subject to a variety of investment-related taxes and higher interest rates on your loans.
Finally, remember that listing the LLC as the titleholder to your home may limit some of the benefits of home ownership. For example:
- Many states and localities offer property tax breaks for a person's primary residence. However, if your LLC is the listed owner of the house, you would lose those breaks since an LLC is not a person. In addition, you may not be allowed to deduct real estate taxes or business use of your home from your federal income taxes.
- If you use your home to operate your LLC for your rental business, you would normally be able to claim deductions for your home office. However if the LLC owns the home, you may not be eligible to claim these valuable tax breaks.
- When the time comes to sell the house, you'll discover a major problem. All profits made on the sale will be subject to capital gains tax. An individual taxpayer can exclude $250,000 in profit from the sale of primary residence (married couples can exclude up to $500,000), but an LLC cannot. This can cost thousands in taxes.
Talk to your CPA about each of these issues to make sure you fully understand the potential tax consequences of quit claiming your new home to your LLC.[/list]