When you are considering what property should be put into an LLC there is one property that you should almost never put into an LLC: your personal residence. Some real estate gurus tell folks to put their personal
residence into an LLC as a method of asset protection, but there is a high cost for that protection.
If a personal residence is put into a LLC, several advantages are lost:
- Interest payment deduction on your personal taxes for a personal residence--The property has been transformed from a personal residence to a business and no longer qualifies for the deduction.
- Ability to sell your home tax free--Again, the property no longer is considered a
personal residence and does not qualify for the special tax treatment. You are simply living in a house that a company owns. It's not a personal residence as far as the tax laws are concerned.
- Homestead exemption--The homestead exemption is a form of asset protection. How much protection a homestead offers varies from state to state. In Florida and Texas, it protects a personal residence 100% from the creditors of the homeowner. In other states the
percentage or value of the homestead varies greatly, so check your state laws. If the residence is placed into the LLC, then it is no longer a personal residence and does not qualify for homestead protection.
Unlike an LLC, putting your personal residence into a revocable trust will not cause you to lose any of the tax or asset protection advantages. The revocable trust does not exist in the eyes of the IRS, and so the residence is considered your personal residence by the
IRS. Also, the homestead exemption allows for a personal residence to be held in a revocable trust and still qualify for the exemption.
The short story is, if you are putting your personal residence into an LLC, corporation, family limited partnership or any other type of "entity," other than a living revocable trust, there is something wrong in 99% of the cases.
