My partner and I are in the process of opening a new account solely for our house purchases. We were just going to open a dual account. And make purchases for materials and bills through that account to keep records easy and billing easy for tax deductions.
We plan to move in to the house once rehab is complete and pull out the equity for another house through refi or heloc (which is another thing we are not sure which way to pull out the equity). We have to refi in a month for sure to get out of our HML interest rate.
My question is however, would it be beneficial to open the account in an LLC name to build credit for the LLC? Would bills and materials purchased on an LLC credit card still be tax deductible since the house is in one name and purchases in the LLC’s? Also, would we even need to build credit for one LLC since each house would be in a different llC for each house we buy? Our current house is just in our name directly.
We are trying to figure out the best way to set things up to get the most long term tax benefits and breaks.
Are you buying it through an LLC then selling it to yourself? If I’m not mistaking home improvements are not tax deductible on personal residence. If I’m wrong somebody, please correct me on this. And if I am write, then mixing business with personal residence could be grounds for trouble if you get caught, once again I’m no expert in this area but that is what I have heard.
sounds like comingling. Personal is personal and business is business.
first , decide who owns the house.
If it’s in your name, then the LLC can’t deduct anything related to it. It’s none of the LLC’s business. (technically the improvements by the LLC to your personal property would probably be classified as a distribution of LLC capital, which can get problematic) However, you will be able to add any improvements to your personal real estate’s basis, which will be taken into account when the property is sold to calculate gain.
If the LLC owns it, then the LLC gets the deduction. It will be treated the same way - increase to basis. But you will also get to deduct utilities while renovating, insurance, etc.
Be sure that you don’t personally pay for LLC expenses unless you complete an expense report and get reimbursed by the LLC. Likewise, don’t pay any personal bills from the LLC. Comingling is a no-no.
Personal is personal and business is business. Treat it like you’re working for someone else.
The house is not currently in an LLC. We bought it into our names because it was our first house and we got some first time buyer’s breaks. It was a wholesale deal, however, once we are finished we will move in and occupy the property. We will be cashing out thru a refi or HELOC and buying a second investment property, which will either be bought by or transferred into an LLC. (Would using personal refinance money to buy a property through an LLC be comingling?) I was under the impression this was ok since the LLC would be backed by my name. Also, what if you refinance a property owned by MAINSTLLC and use the funds to buy a property through SIDESTREETLLC. Is this a conflict of interest?
I guess what I am asking is, is it beneficial to build credit for an llc since each house would be in a different llc’s name? Right now my personal credit score is awesome. Or is it easier just to buy the property and transfer it into an LLC?
once we are finished we will move in and occupy the property
danger danger. unless you are a tenant and paying rent, living in a LLC owned property is comingling. if you own it yourself, nobody cares. If you don’t own it, what makes you think you just get to live there? YOU ARE NOT THE COMPANY.
Would using personal refinance money to buy a property through an LLC be comingling
yes, unless you make a capital contribution or loan to the LLC, which makes it the LLC’s money. YOU ARE NOT THE COMPANY.
what if you refinance a property owned by MAINSTLLC and use the funds to buy a property through SIDESTREETLLC. Is this a conflict of interest
no, it’s comingling. IBM doesn’t let Microsoft use its money to buy a new factory. Neither should Main let Side use its money. They are SEPERATE BUSINESSES. Now, if Main wants to loan Side some money at a reasonable interest rate…
my question then becomes how do property owners who own several properties in various llc’s finance new purchases? they must always “loan” the money and collect interest from the loan even if the person is president of both llc’s?
basically, I am trying to figure out how to correctly and legally go about financing my next property. the current one should be done in two months and we are refinancing into an OO loan since the property is in our names, however, we are planing on using the cash out money for the down payment. however, the next property will be purchased through an llc, and because of this we will have to loan the money from ourselves to our llc and whatever interest rate we decide? even if its just 1% or whatever?
the fact of the matter is this first house is a personal residence; not an investment property. the money you put into it to rehab could be taken into considering to adjust the cost basis upon sale although probably not necessary as you will get your Section 121 exlcusion after lving there for 2 yrs. the cash you pull out and put into the LLC to purchase investment property should be treated like any other contribution to an LLC. Its origin for tax purposes is not important although interested paid to service that portion of the debt probably should be taken as deduction as investment interest; not interest on a peronsal residence (differnt lines on ScH A of 1040).
attempting to classify this property as an investment property is likely to land you into tax trouble (IMHO). Now, if you were to rent this property out for say 6-12 months and then convert into a personal residence, that might be a different scenario for a tax standpoint. However, in the end, IRS always likes to look at intent and you mentioned you got some “first time buyers discount” that leads me to believe this should not be treated as investment for tax purposes even under that scenario.
I am not sure you really got an answer to your original question.
In my opinion, how you set up your bank accounts and whether you are comingling funds has no bearing on your tax liability. Comingling is really a legal issue that could erode whatever asset protection you hope the LLC would provide.
yes, we got a state tax transfer credit for a first time buyer, and the house is in our name currently NOT in an llc. all references to an llc were in reference to future properties being bought into an llc.
at closing we had to sign a rental registration form with the city of baltimore. at closing we also had to present an insurance binder for a non owner occupied vacant home in order to qualify for the loan.
so currently the property is set up as a non owner occupant home.
once we are done rennovations (3-4 weeks) we are going to refinance the home into a traditional home loan and probably going to cash out around 15k to pay for materials that are on home depot credit cards in our names. the loan that we refinance into will be an owner occupied home loan since the rennovations will allow for it to be considered a livable dwelling.
does that answer all confusion?
sorry for the confusion
in reference to my original question I was trying to figure out the best way to use cash out/HELOC money from this home to purchase a property into an LLC formed by us down the road (hopefully a few months from now).
in addition I am trying to figure out if our repair/renovation costs will be deductible since the property was a non-owner occupied home, and after renovation will be an owner occupied home. so will all purchases before refinance be deductible? this is why I was asking about how to set up a dual account with my partner and myself, or does any of this even matter?
we had to go hard money on this house because it was a wholesale home and was the only financing the company accepted.
No, your rehab costs are not deductions. Does not matter whether the property is owner occupied or non-owner occupied. Rehab costs are never deductions, instead, you add this cost to your cost basis.
this is why I was asking about how to set up a dual account with my partner and myself, or does any of this even matter?
Still makes no difference. How you set up your bank accounts has no affect on your future tax liability. It does, however, affect whether your LLC will be able to provide effective asset protection for your personal assets.
so are there any more tie ups or loose ends when we refinance into a conventional loan and turn it into an owner occupied dwelling vs a hard money vacant home that we need to worry about or cover before we refinance?