SHOULD I PUT MY HOUSE IN MY LLC?
Clients who have formed, or are forming, a limited liability company (“LLC”) often ask whether they can put their primary residence in their LLC. Below are some of the reasons this is a bad idea:
- Idaho provides a $100,000 homestead exemption that protects your personal residence from the claims of unsecured creditors. By putting your personal residence in an LLC, this exemption may be lost.
- If the LLC is established for a business purpose, but owns a personal residence, then a creditor may have a stronger argument for ‘piercing the corporate veil’ because of the commingling of personal and LLC assets.
- 26 U.S. Code §121 provides a $250,000 capital gain deduction (or $500,000 capital gain deduction for joint returns) for sales of personal residence in which the owner has resided in the house for at least 2 of the last 5 years. If the LLC is only owned by you and the LLC is disregarded for tax purposes, then you should retain the exemption, but if the LLC is owned by additional persons, then the capital gains deduction may be lost.
- If you set up the LLC to reduce estate taxes by transferring ownership shares to family members but continue to live in the house without paying rent, the IRS may seek to have all the assets in the LLC brought back into your estate on your death on the grounds that you have retained beneficial use of the property under 26 U.S. Code § 2036.
- If the LLC is owned by members in addition to yourself and you are not paying rent to the LLC, then your use of the residence could constitute self-dealing and breach of your fiduciary duty to the other members.
- Transferring a personal residence into an LLC may result in acceleration of the mortgage – meaning the outstanding principal balance would need to be paid. In addition, it may be difficult to obtain a mortgage on the property after it is in the LLC.
There are alternate ways to accomplish objectives relating to personal residences that may be more advantageous than putting the residence in an LLC. Attorneys at Mathieu, Ranum & Allaire, PLLC can assist you in exploring your options and the pros and cons of each.
Mathieu, Ranum & Allaire, PLLC is a boutique law firm with offices in Boise and Sun Valley, Idaho focusing exclusively in the areas of estate and trust planning, probate and trust administration, asset protection, business law and charitable organization laws. We represent individuals, families, trustees, heirs and beneficiaries, entrepreneurs and closely held businesses, tax-exempt organizations, and family offices, as well as professionals and business owners potentially exposed to future creditor claims.
The foregoing is NOT legal advice. We have prepared these materials to inform and educate. They are not, and should not be considered, legal opinions or advice to anyone, nor do they create an attorney client relationship by your reading them. These materials may not reflect the most current legal developments in the applicable area of law. Furthermore, this information should in no way be taken as an indication of future results.
© Mathieu, Ranum & Allaire, PLLC. 2015