Discussion:Putting Residence in LLC

see clarification of SMLLC vs MMLLC below

How will the lender see it? Will it trigger a due on sale clause?

How will the homeowner's insurance see it? Will the taxpayers need renters insurance for the contents?

How will the county recording office/transfer tax people see it? will a transfer tax (and re-assessment for property tax) be required?

And: How will the Homestead Exemption be affected? You Florida people can answer this.

Of course, then you've got the estate planning issues to deal with. How will the property transfer at the death of one spouse?

What about the annual LLC filing fees with the Secretary of State? What happens if some are missed?

Kevin - good points - I already checked with our county about the HOmestead Exemption and they said that as long as the couple were the only members and the LLC was done for "estate planning purposes," they could keep their homestead exemption. They don't seem to be really strict about that issue in this area. The client is in the enviable position of not having a mortgage. The only real issue I am concerned about is the Section 121 issue.

"You also asked whether you could take advantage of the Capital Gains exclusion under I.R.C. §121 if you transferred your home to an LLC. The IRS has generally treated single member LLCs as disregarded entities, which means that if you transfer your home to an LLC and take back all the membership units, you’ll still be eligible for the capital gains exclusion if the LLC then sells the home.

However, if you transfer one or more membership units to another person (i.e., your son) while the LLC still owns the home, then the LLC will be converted from a disregarded entity to a partnership for tax purposes. In that case, it appears that you will lose the capital gains exclusion if the LLC then sells the home while you still own some of the membership units. In that case, the LLC would have to file a partnership tax return, and the net profits would then be taxed to you and your son in proportion to your membership interests."

This seems logical - but of course logic often has nothing whatsoever to do with the Code! Again, if anyone has a specific source of law (a Reg., Rev.Ruling, Case, etc.) on this issue I would love to have a cite.

(i) Trusts. --If a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.

(ii) Certain single owner entities. --If a residence is owned by an eligible entity (within the meaning of §301.7701-3(a) of this chapter) that has a single owner and is disregarded for federal tax purposes as an entity separate from its owner under §301.7701-3 of this chapter, the owner will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the entity will be treated as if made by the owner.

Allowable ownerships are specifically defined.

I was thinking that just recently (like within the last two or three months) they changed the rule for disregarded entities to provide that if the ownership interests are owned solely by husband and wife, you could disregard. I think that so many husbands and wives who had an LLC were disregarding the entity that the IRS finally just changed the rule.

But seriously - thanks for the cite. That helps.

P.S. - who needs research tools when you've got this cool board!?!?!

So, a number of questions come to mind...1) Can the h/w LLC be disregarded? 2) If not disregarded, must the LLC file a pship return (would not want to use C corp), 3) Since the LLC acquired the lot and took out the mortgage to do so, can the interest on the loan be treated as investment interest on the pship return and passed through to the members?, 4) If for some reason they ended up just constructing their second home on the first lot, would they be able to treat new construction loan interest as "home mortgage" interest, or does the LLC ownership prevent that?

2. LLC does not file C Corp return 3. Depends on intent. Investment intent yes, Plan to build personal residence probably not. 4. Depends on prior answer to number 1.

However, I would think that each spouse could hold a 50% TIC interest in a separate LLC.

1. Has the client eliminated their ability to take the Section 121 exclusion? (I am thinking that they have)
2. I am also guessing that they will not be able to depreciate their personal residence or to deduct expenses that would not be deductible to someone who did not form an LLC. This seems like a 'sham' trasaction, as the LLC has no real 'business purpose'

I am interested in others thoughts..

Thanks, Chris