I am 28 years old and am eager to get into real estate investing ASAP. Currently, we are looking for a house to live in. But I don’t plan to go through conventional way.
I was wondering whether you can purchase a house under corporaiton or LLC so that we will be renting the house to ourselves. One advantage I see is that when we sell the house in short term we will be able to go through 1031 exchange right away (assuming there is capital gain). Our credit is good and we have about $100M to down pay.
I suppose you can make a case for depreciating the “rental property”. In addition to the normal Schedule A deductions for mortgage interest and property taxes, you can also deduct PMI (if any), repairs, maintenance, hazard insurance premiums, and homeowner’s association fees from your rental income.
Rent you pay the LLC is taxable income to the LLC and the profit on the sale is also taxable income, unless deferred with a 1031 exchange. Note that the capital gains taxes are only deferred – not excluded.
Keeping your primary residence in your own name gives you the same tax deductions for mortgage interest and property taxes, while PMI, hazard insurance, association fees, repairs, and maintenance are personal (non-deductible) expenses. However, once you have owned and occupied the property as your primary residence for two years of the five years prior to the sale, your sale profits are tax free – not simply deferred.
If you are in a quickly appreciating market, keeping the property in your own name may give you more after tax income in the long run.
I question your short term strategy. If you are planning to only keep the house for a short term, why not just rent from a third party. You can usually rent a $250K house a lot more cheaply than your costs of ownership. Instead of incurring the settlement costs of buying and selling, you just pay a refundable security deposit and monthly rent.
If you really want to seize the day, keep your money working for you and invested in assets that generate income. Rent when renting is cheaper than owning the same property.