Can I Sell My House To My Business?

Can I Sell My House to My Business?

Absolutely. A business owner can sell their primary residence or rental property to their business for a fair market value – and in many cases, this can lead to major savings.

One of the biggest reasons that a homeowner would do this is for tax advantages. Because this converts a home from a personal asset to a business asset, it allows you to deduct business expenses like property taxes and mortgage interest. You can also take a depreciation expense for property owned by a business, reducing your company’s income tax. 

Turning personal assets into business assets can protect you in the case of legal issues, and it will also make it easier to complete your tax return, particularly if you’ve sold a rental property to your business.

Additionally, if you have a real estate investment LLC, you can generate rental income by turning the home into a rental property, creating passive income that can then be used for other expenses your business may need. 

Establishing Fair Market Value

Fair market value is a critical consideration when selling to your own company. This is because gains from a property sale will be considered at the fair market purchase price for tax purposes, even if you did not sell it to your company for that amount. 

Impact on Tax Situations

There will be significant tax consequences for selling a home to your company that you must be aware of to ensure compliance. Otherwise, you may find yourself underestimating your tax returns and facing penalties for non-compliance. 

Capital Gains Tax

In most cases, when you sell a property, you will have to pay capital gains tax on the profit. You may believe that because you sold it to your own company, you did not actually realize any profit, but tax authorities will see it differently. 

As this is a non-arms’ length transaction, tax laws may require that the sale be taxed at the actual property value rather than what you paid yourself for, reducing your tax savings. 

However, your personal return may be eligible for a capital gains exclusion if you have lived in the home for two out of the last five years, which reduces the taxable income from the sale. If you did not, then the proceeds from the sale would be taxed at your ordinary income tax bracket, which will be significantly higher. 

Potential Tax Deductions

Selling your home to your corporation will allow you to utilize depreciation recapture, which means that you can make deductions as your property ages. Over time, this depreciation deduction can save you thousands of dollars, freeing up cash for your business. 

A commercial property, whether rental properties or offices, can deduct a number of property-related expenses, including property tax, mortgage interest, rent, down payment, and home repairs. 

Additionally, selling your home to your LLC reduces your estate and can help you avoid the death tax, leaving your heirs with more money to enjoy. 

Converting a Home to Business Property

While it can be advantageous to sell your personal property to your LLC, it’s crucial that you understand how your deductibles will change before going through with the sale.

Changing Deductible Expenses

An LLC is often able to take far more deductions than homeowners, but this does not mean that you’ll still be eligible for every deduction that you are used to.

Firstly, any maintenance and upkeep of the property now becomes a business expense that may be eligible for deductions. For example, you can deduct property taxes, loan interest, homeowner’s association dues, and some repairs. 

If you will be using the home as a rental, you can take a depreciation reduction for each year that the corporation owns the property. This depreciation is typically 3.636% per year for 27.5 years. This will not include the land that the building is on, just the physical building. 

However, there are other deductions which commercial buildings will no longer be eligible for. 

Older business owners who have been enjoying the homestead exemption must be aware that an LLC-taxed property is no longer eligible for this, as it is no longer considered a primary residence. Thankfully, the benefits of this deduction on property taxes and asset protection can be offset by the property tax deductions on commercial property. 

Selling a Primary Residence 

If you decide to sell your personal home to your LLC, you have to decide whether to turn it into a rental property or stay in it and begin paying rent to yourself.

It is important to note that while it’s possible to sell your home to your LLC and then pay rent to your business entity while living in it, this will make your tax circumstances more challenging. 

You’ll have to have a fair market rental agreement so that you’re not paying rent well below the typical value, and you will also have to have a separate bank account for your LLC that will collect the money. This will then become taxable income for your business, though the tax deductions discussed before will still apply.  

Consultation with a Tax Professional

Any time you are selling property, it is always a good idea to work with a legal professional, but this is especially true when you are selling your home to your LLC. A good tax professional can help you determine whether you can avoid capital gains tax and if the benefits outweigh the risks. 

As every LLC has different circumstances, getting help from a qualified accountant to untangle the possibilities for your corporation will ensure you don’t underpay your taxes and run into legal trouble. 

Selling Your House to Your Business: Step-By-Step Process

If you’ve decided to sell your house to your LLC, follow these steps to make sure you reap the maximum benefits from the sale. 

Determine Fair Market Value

A real estate agent can help you get in touch with a qualified appraiser. They will determine the appropriate value of the house, which will then become the basis for your sale.

Consult With Professionals

Talk to a real estate attorney and tax advisor to draw up the sale agreement and double check that you will not run afoul of any tax codes that could lead to significant legal issues down the line. 

Prepare the Sales Agreement

The sale agreement is the same as if you were selling to an unrelated person in an arms’ length transaction. This will include the purchase price, payment terms, and contingencies that must be completed before the sale can go through. 

Speak to Your Lender

If you still have a mortgage, you must talk to your lender, as the loan will now be transferred to another entity. You may need to refinance the loan to proceed with the sale. 

If you have already paid off the house and the LLC will not be paying for the transaction in cash, then you will need to secure financing through the entity. Thankfully, a business entity may have access to different loan options than a personal borrower, many of which come with more advantageous terms. 

Transfer Ownership

Just as when selling to other homeowners, you need to transfer the deed to your LLC with the local government’s office. 

This involves completing a change of ownership form with your LLC as the new owner, and then working with a real estate attorney to transfer the deed. The deed must include the names of the grantee and recipient, a legal description of the property, and both signatures. You’ll then sign the deed in front of a notary public and record it with the relevant county recorder’s office.

If you are using financing for the sale, then the lender must be involved, as they will need to file a deed of trust. Your loan officer can explain to you the steps that are involved in this process. 

Adjust Your Accounting

Now that the property is owned by your LLC, you will need to record this purchase and all the expenses associated with the home in your accounting. This includes listing it as an asset and recording any rental income if you have turned it into a rental property. 

Consider the Tax Implications

Both your LLC tax return and personal return must reflect the sale, which is why it is so important to work with a real estate attorney and tax professional throughout the process. They will be able to advise you on how to represent the sale on your tax returns and how to avoid exorbitant taxes on the acquisition through careful accounting. 

Pros and Cons of Selling Your House to Your Business

While selling a home to your single-member LLC, S-Corp, or other corporate entity can be incredibly beneficial, it can also come with major downsides that you must be prepared for. Here are some of the most common pros and cons of this type of transaction. 

Pros of Selling Your Home to Your Business

Tax Benefits – There are many more deductions available to LLCs than for individuals, which can significantly reduce your company’s income.

Consolidating Assets – Streamlining your taxes by placing all home expenses as business expenses can make it easier to complete returns both for yourself and your LLC.

Asset Protection – You can purchase LLC liability insurance that will protect your property should your corporation run into trouble.

Income Generation – If you turn the house into a rental property, then you can generate more income by charging rent.

Cons of a Business Real Estate Sale

Complex Legal and Tax Implications – This sale is not as straightforward as if you were selling to another individual. 

Financing Challenges – It’s typical for an LLC to have to secure financing for a house purchase, but this may be more challenging when you are selling to yourself. You will need to be transparent with a lender and explain your goals to secure refinancing.

Impact on Personal Taxes – You may not be able to access the home sale tax exclusion depending on your time of residency, which can significantly reduce the financial windfall of the sale.

Loss of Homestead Exemption – This exemption applies only to residents, not to businesses. Your property taxes may go up more than deductions can offset. 

Conclusion

Selling your house to your own LLC can be an excellent way to generate rental income or avoid excessive taxation if done properly. However, these sales are complicated, and it is crucial that you work with professionals who can advise you on whether you will save money based on your specific circumstances. 

Failing to plan ahead can cause significant legal challenges in the future, as well as major tax implications. Always work with experts you can trust to ensure that the sale is completed to your advantage.

A-List Properties Is Your LLC Ally

We offer tailored service to those seeking to sell homes to businesses, as we are highly familiar with all the nuances of these transactions. 

A-List Properties is committed to ensuring you the swiftest and easiest home sale imaginable, all without extra commissions or fees. We buy homes throughout Texas, including in Houston, Dallas, and Austin! We will purchase houses in any condition without the need for inspections, appraisals, cleaning, or repairs. For more details on our real estate solutions, call (972) 526-7042 or get your free cash offer today!