Q: We are a California limited liability company (LLC). We would like to know if we can purchase a residential property under the name of the company. We plan to use it as our primary residence and also conduct our business from there. Please tell us the pros and cons of making this purchase.
A: There are probably too many issues to discuss in this answer, but we’ll give you a few to start mulling over.
If the home is your primary residence, you may lose tax benefits by placing the home in a limited liability company (LLC). For one, under current tax law, if an individual owns a property, that individual can sell the property and exclude up to $250,000 from federal income taxes if that individual used the property as his primary residence for two out of the last five ($500,000 can be excluded from gain for married couples).
If the LLC owns the property, the LLC is usually not considered a person for purposes of the primary residence exclusion. In your case, if the LLC is disregarded for purposes of your owning the home in a similar manner as living trusts are disregarded, you would be entitled to federal income tax benefits as if you owned the home in your name. But for local property tax purposes and state income tax purposes, you may find that those taxing authorities might not allow you to benefit from reductions in state income taxes and local property taxes for homes owned by individuals (also known as the homestead exemption).
Many local governments won’t give those real estate tax benefits to corporations and companies. These real estate tax benefits can be substantial and you might not want to miss out on them.
If you run your business out of this home, you may run afoul of zoning laws in your municipality. In some cities, you may not use more than 10 percent or 15 percent of a home for a home office if the property is located in a residential neighborhood.
For federal income tax purposes, if the home is owned by the LLC, you might create unusual circumstances in your ability to deduct all of the real estate taxes, amortize the entire value of the home, or to deduct the entire amount of the interest payments for the loan on the property on your federal income tax form, particularly if you use all or part of the home for your business.
Since you have indicated that the home will be your primary residence, it’s unclear why you would want to hold the property in the name of the LLC.
If your intent is to protect your personal assets from liens and creditor’s claims against your business, you might be making a mistake by having the home owned by the LLC. If your business is sued and loses in litigation, the assets of your business will be at risk. If you don’t have adequate homeowners’ insurance and someone slips and falls on your property, the home will still be at risk and you could lose it.
On the other hand, if the LLC runs its business separately from what you and your wife do in the business, if the LLC is sued, the litigation will only risk the assets held by the LLC. You could lose the LLC, but you shouldn’t lose the home. (Still, it seems as though you’d be taking a fairly big risk by mixing your personal assets with the assets of your business.)
Finally, if you’re planning to own the home and obtain loans on the home, you may find it difficult to get a lender to give you a loan on the basis that the home is a primary residence. Because the home is owned by the LLC, most lenders may treat the home as an investment property and you may end up having to pay greater costs to close the loan on the property and probably have to pay a higher interest rate on the loan.
Talk to an estate planner to help you solve some of your issues. You’ll probably find that he or she feels the home should be owned separately from the business but that you and your wife can lease a part of the home to the LLC. The rent would be income to you on the personal side, but you would be able to deduct some of the home expenses as business expenses due to the rental of that portion of the home to the LLC business.
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