Can You Buy a House with an LLC and Rent It to Yourself?

The vast majority of home buyers purchase property using their personal information. However, some people have considered forming limited liability companies (LLCs) and using the business to purchase property. From there, they can rent the house to themselves as the tenants with the LLC is the technical landlord. 

There are several financial considerations that come with forming LLCs, along with taking steps to collect rent from yourself. This is certainly an option as you look for homes, but it might not be the best choice for everyone.

In this article, we will share about the complexities of an LLC home purchase and the legal aspects of renting a house to yourself.

At FastExpert, you can find qualified agents who have experience with buying properties from LLCs. You can also review several agent profiles before contacting your top choices.

Why Consider Buying a House with an LLC?

LLCs come in a variety of shapes and sizes. A single person can form a limited liability company to protect their business if they are self-employed and want to separate their business income from personal funds. LLCs are often formed to protect assets from litigation or ensure privacy in business transactions.

It used to be difficult to secure mortgages through LLCs; however, this practice is becoming more common. As lenders encounter more applications from LLCs they get better at evaluating the risk of lending to the business and securing enough information to complete the underwriting process. 

Mortgages for LLCs are becoming increasingly easier to obtain. Loans for LLCs typically require a 25 percent down payment, although there are programs available for lower down payments with certain restrictions and requirements. 

People form LLCs most often when they are looking to buy a rental property. However, there are some times when you might want to use a limited liability company to purchase a primary residence.

Protecting Personal Assets

For many people, the house they own is their most valuable asset. The average home price for fall 2023 is $430,300, which means countless homeowners have hundreds of thousands of dollars in equity from the properties they own.

If the homeowner falls into debt or gets sued, collections officers could go after the property. A limited liability company protects that. 

This also works the other way. Business owners form LLCs in order to protect their personal assets from being pursued. If the company falls into debt, creditors and collectors can’t go after the personal accounts and assets of the business owners. 

Liability protection can protect you, your family, and your assets in the event of a lawsuit or debt.

Potential Tax Benefits

One of the main reasons why someone might buy a house with an LLC is the tax benefits that come with owning your house as a business. Many people believe they can deduct business expenses to lower their tax bills like utilities, interest, and repairs as part of the day-to-day operations. However, this isn’t always the case. Furthermore, you might end up paying more taxes on the income of the property in the long run.  

“One issue with collecting and declaring rent is that you are generating taxable income for the LLC from yourself,” says Denise Elizabeth, senior finance and accounting editor at FundsNet. “So you are actually going to be paying tax on your rent money.” 

Talk to a tax professional before you buy a house with an LLC. They can outline your estimated tax burden to help you understand whether this step is worth it.

Privacy Considerations

A final benefit of buying a house with an LLC is to maintain your privacy. You can make it harder to find out who owns a property and conceal other ownership details like your contact information.

This might be useful for public figures or for people who don’t want their information accessible to the average person.

Legal and Financial Implications of Renting the House to Yourself

Buying a house with an LLC comes with multiple financial implications and tax considerations. However, this becomes significantly more complicated when you want to rent a house to yourself.

It is possible to live in your own rental property, but there are significant drawbacks to consider first. Here’s what you need to know. 

Legal Aspects to Consider

The first step to living in your own rental property is to draft a lease agreement for yourself. It might sound absurd, but you need to go through all of the formal steps that you would for a standard tenant. You can refer to this rental agreement when you file your taxes, if you get audited, or if you need to comply with any regulations in your area. 

Once you have this agreement in place, you will need to pay rent to yourself each month. This creates financial records that you kept up with your home expenses as a landlord while collecting rent from your tenant (also you). You will need to take out a separate bank account that the LLC owns to transfer your rental money each month. 

Also, you will need to pay each year to keep your LLC active. Annual filing fees for LLCs range from $10 in some states to $500 in others. See how much it costs to file and maintain an LLC in your state to ensure you build this expense into your annual operating costs.  

Financial Considerations

By treating your home like a rental property, you have to go through all of the financial aspects that you would if you wanted to collect rental income as a standard landlord. First, consider a fair rental rate that a similar investment property would charge. While homeowners pay their mortgage, utilities, repairs, and other costs separately, renters often pay a monthly fee that covers all of these expenses. You can decide how much you need to pay your LLC monthly to cover your expenses. 

One thing to look out for as you work on your rental property finances is phantom income. This occurs on profits for the company that hasn’t been distributed or collected yet. For example, if an LLC reports $100,000 in profits for the year but only $80,000 has been paid to shareholders, the company is still on the hook for reporting and paying taxes on the full $100,000. Using your rental property as an example, if you collect $2,500 from yourself monthly but only have $2,300 in expenses, then $200 is phantom income. 

Tax Implications

While you can put a significant amount of money into your house, remember that every deposit is taxable rental income. You will have to report this income when you pay taxes and might owe money to the IRS. As a business owner, you will need to pay both personal taxes and a self-employment tax. The financial benefits that come from operating a rental property that you live in could be erased once it’s time to pay taxes. 

Another reason to talk with a tax professional before taking this step is to understand the capital gains tax. When it comes time to sell your home, the IRS might not consider the property a primary residence because it was used to collect rental income. You might end up paying taxes on the profits of the home sale and could miss out on exemptions created for individual homeowners.

LLC Home Purchase and Renting to Yourself

If you decide that buying a house as an LLC and living in your own rental property, and following a rent-to-own path is the best option for you, make sure you take steps to protect yourself.

You can get organized in a way that makes it easy to report taxable income while enjoying the liability protection that comes with securing your house as part of your business. Here are two key steps to follow.

Hire a Real Estate Agent

Like any good business owner, you want to make strategic decisions for your company. Hire a real estate agent who can help you look at various houses that you can use for your self-rental property.

A qualified Realtor can help you get a good deal on a house while helping you navigate the inspection, mortgage application, and closing process. They should be able to streamline many of these processes for you if you trust their experience and abilities. 

Working with FastExpert gives you more flexibility and control over the Realtor who helps you secure your rental property. Browse top agents near you!

Craft a Rental Agreement

Work with your Realtor to get a sample lease for your rental property and then modify it to your needs. You need a fair and detailed rental agreement for your LLC and for you as the tenant. The agreement needs to comply with legal standards and should cover exactly what you as the tenant pay and what the money goes to. 

This agreement is an interesting part of owning a house through an LLC. In some cases, your name might still be on the mortgage as a co-signer. Your lender might also use your personal information during the approval process. But for the most part, you should operate as an objective tenant as if you were working with any other landlord. 

“When you buy a house using an LLC, the property is tied to that business,” says Jonathan Pressman, a Realtor and insurance salesperson. “So if something happens to the house, the business is on the hook, not you personally.

However, if you agree to a personal guarantee on a mortgage, you could ‘pierce the corporate veil’ by mixing your LLC’s finances with your personal finances.” 

For example, if your house needs a new roof, your LLC might not have enough funds for the repairs. You can use your personal account to cover the cost. You can also potentially lend the money to your business which you then pay back. Once again, talk to a tax advisor or business attorney if you are unsure about any of this.

Make Sure Buying a House With an LLC is Right for You

While it is possible to buy a house with an LLC and then rent it to yourself, this process can become more complicated and expensive than it is worth.

You will have to manage your home with the same care as a rental property while reporting taxable income to the IRS each year. Along with filing personal income taxes, you will also need to file business taxes and track your expenses carefully. If you aren’t careful, any tax benefits from this choice could be wiped away. 

Consider buying a house as an LLC if you are worried about asset protection or privacy. However, you don’t have to start a whole sole proprietorship just to collect rent from yourself. 

 To buy a house in your desired area, find a real estate professional through FastExpert. A quality Realtor can help you find a personal residence that you love and want to live in for several years. They can also help you understand your tax burden as a homeowner and review opportunities to save on various expenses.

If you are still unsure about forming your own LLC for asset protection, talk to a tax attorney. They might be able to offer alternative options that are better suited to your needs.