Tax cuts, real estate taxes, and home ownership

With the increase to the standard deduction, one of the big draws for us to buy a home is now gone (note, we already own our home)--that being the writing off of the real estate tax, which is no small amount for us in Chicagoland. Has anyone done any analysis to see if it would make sense to transfer real estate holdings into an LLC or S-Corp? I'm wondering if it would make sense. 

Please keep the politics out of this. We're just dealing with the facts that the standard deduction is now $24k for married couples, and it no longer makes sense for us to itemize.

As a recent (fall '16) urban homeowner , I'm now curious about this as well. DC property tax is no joke.

First question - do you have a mortgage on the house or do you own it free and clear?

I seem to recall that mortgage lenders don't tend to be too happy (or allow) the transfer of a mortgaged property into an LLC.

I'm no expert, but I understand the interest rate for a rental property (since you would essentially be renting your house from your LLC) tends to be higher than for a private owner.  I'm almost certain you cannot transfer your existing mortgage to a LLC.  Could doing so save you money?  Possible, depending on the numbers, but I would anticipate some legal wrangling. 

Not sure if it was an edit or not, but he states they own their home.  I assume that menas in the clear, not mortgaged.

Sorry, we have a mortgage. So the transfer and increased interest rates would likely make it a non-starter.

What is the idea? To write off the property tax as an expense vs the LLC's income? You could use the same argument for most home expenses. But I think it would just be a wash, because any of the LLC's profits would flow through to the owner and be taxed as income.

example: current home expenses = 12k/year (currently paid with after tax money). Say that 100% of the home expenses qualify as business expenses for the LLC, and the LLC charges you $12k/year in rent. Therefore the LLC gets to write off 100% of its income as business expense and it will have no tax liability, but you still pay it $12k in rent in after tax dollars. But if you cannot write off 100% of home expenses as business expense, like maybe principal payments (I'm not sure of the exact rules but that is something that might not qualify as expense), then you would essentially pay tax twice on those 'expenses'. If you made the LLC run at a loss, then sure, that would be a short term gain, but the IRS will catch on to that sooner or later.

so, I guess I'm not seeing where you save money?

I'm assuming this would require refinancing. Most non owner occupied property will require a down payment of 25% or more. Or, I guess equivalent equity might work?  So that's one hurdle in addition to the likely higher rates and closing costs of the refi.

Another thing to consider is the property tax rate. Where I live, an "owner occupied" property has an annual property tax cap @1% of assessed value, while other properties can be taxed up to 2%. If your state has similar laws, that change alone could kill the deal.

What STM317 said.  Back when I had rental property, the tax rate was higher.  Around here it is called homesteading when you live in the property, and its rate is much lower.  If you do not, then you pay the higher rate.  It might be different in your state, but I imagine what you wanted to do would not be easy or worthwhile in the long run.

There are many reasons this will not work, including but not limited to: The general inability for a newly minted real estate LLC to secure such a loan in its own name (even at the higher 'non owner occupied' interest rates), the mortgage provider exercising the 'due on sale' clause if the property is instead transferred directly to LLC while keeping the existing mortgage, the cost and effort to run the LLC as a separate legal business entity renting the home back to you, the circular cash flow, and convincing the IRS to treat it as a separate legal business entity.  Suffice to say, you would be doing little more than opening yourself up to legal trouble with the IRS and/or your mortgage lender. If it were this simple, and legal, everybody would already be doing it.

While I've had similar thoughts before too, the pragmatist in me would simply say: If you were previously deducting more than $24, you are fortunate to have attained such bountiful life circumstances.  If you were previously deducting less than $24k, you are fortunate to now be able to deduct more than you previously were.

One thing to confirm- the combined state, local, and property taxes strongly exceed $10,000.  If you are below that, it's still 100% deductible, above that, only $10k.  We did the math when finishing our '17 taxes, and found that we are really close, so it won't change much and we will still be able to deduct the taxes.

Thought existing mortgages under $750k were grandfathered and we're still able to right off the interest?

docwyte said:

Thought existing mortgages under $750k were grandfathered and we're still able to right off the interest?

We are, but we lose any point to doing that with the new standard tax deduction. No point in itemizing. 

In reply to mtn :

Have you run any estimators?  We thought the same until we ran the models, and that also includes us finishing our mortgage next year- so we are not exactly paying huge interest.  When we run the numbers, we still itemize.  

That's also why I asked about the $10K total of estate and state taxes.

I'll be a couple percent ahead of last year in terms of reduced rate but it will be the first time in 20 years that I'm on short form.  I need to see if I can move enough retirement contributions to pretax to get long form.  Have to see where the next lower tax bracket starts.

Won't know till I run the numbers if it's worth the effort but seemsblike I'm leaving something on the table otherwise.

In reply to mtn :

Depends on how much you have to itemize...

In reply to alfadriver :

Do have a link to any good estimators that you have found?

Time for me to get a tax guy.  I’m just on the positive side of a higher tax bracket but far enough away that donations and retirement savings won’t move me back down.  Not loving my tax situation right now. 

SVreX said:

In reply to alfadriver :

Do have a link to any good estimators that you have found?

Not really- all did was try the first couple of ones that come from a google search, and then also am waiting for turbo tax to update their estimator (since that's what we use).

One of the best things is to look at your old taxes, and see the level of deductions you have, and how that is impacted.  Like for mtn's situation, it's very governed by the $10k limit of property taxes + state taxes.  Others will depend on that limit plus their historical deductions and how that compares with the new standard deduction amount.  

Other than that, the new code is basically a minor tax cut.

We're going to be right on the cusp of that 10k limit on property+state taxes. But I still don't see how itemizing will help even if our property taxes were $15k--the standard deduction is $24k, which is almost always going to cover any itemizing. 

Fueled by Caffeine said:

 Not loving my tax situation right now. 

Perhaps you might like your tax situation better if you had a conversation with your employer to eliminate the amount of pay that you'll be taxed at the higher rate on? Alternatively, you could always donate the sum taxed at the higher rate to the charity of your choosing, to 'unburden' yourself.

Fueled by Caffeine said:

Time for me to get a tax guy.  I’m just on the positive side of a higher tax bracket but far enough away that donations and retirement savings won’t move me back down.  Not loving my tax situation right now. 

Unless you have a bunch of capital gains or dividend income, there's no real problem being right on the positive side of a higher tax bracket. You pay a little bit more tax on that last bit of income but if that income wasn't there, you'd have less take-home, so no big deal.

In reply to Driven5 :

Nope but a 15%-30% pay raise is just one recruiter away. 

In reply to Fueled by Caffeine :

In that case, definitely stay where youa re.  If you don't love your tax situation now...You'd HATE it then.

In reply to Driven5 :

No you’re thinking about it all wrong.  It’s a psychological thing.  I’m just over the tax bracket and therefore get angry because i make more but see no real benefit because taxes went up. Being deeper into the bracket means more tax but more take home and therefore benefits are realized. It’s not rational   I realize.