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Taxpayer and spouse form an LLC. They want to purchase a condo

Taxpayer and spouse form an...
Taxpayer and spouse form an LLC. They want to purchase a condo as their principal residence in the name of the LLC. Will the mortgage interest and real estate taxes be deductible on Schedule A and will ownership by the LLC affect the $500,000 exclusion from capital gains assuming the other requirements are met to meet the exclusion?
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11/2/2012
Shane-CPA
Shane-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 265
Experience: Shane Northrop is a Certified Public Accountant, Personal Financial Specialist and a Chartered Global Management Accountant
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Shane-CPA :

Hello...my name is XXXXX XXXXX I am a Certified Public Accountant. I look forward to helping you with your questions.

Shane-CPA :

There are several reasons from an asset protection standpoint on why it is beneficial to purchase your primary residence in the name of a company. However, as you will often see, asset protection and tax reduction strategies, often don't work together as well as you might expect.

Shane-CPA :

Section 121 of the Internal Revenue Code allows you to exclude up to $250,000 (if you're single) or $500,000 (if you're married) of capital gain when you sell your primary residence if you've lived in and owned your home for at least two of the previous five years. If you transfer your primary residence to a multiple member LLC, you lose the ability to benefit from the capital gain tax exclusion.

Shane-CPA :

In addition, you will likely no longer qualify for property tax and mortgage interest income tax deductions, if you transfer your primary residence to an LLC. This is because you no longer own the property (so you can't take the deduction personally) and an LLC can only deduct ordinary and necessary business expenses (so the LLC can't take a deduction either). If there is no business purpose for the LLC to own your residence and you do not pay rent to the LLC, the LLC's expenses incurred to maintain the residence are not deductible.

Shane-CPA :

Another item of importance to highlight, which isn't in your question but is important to consider, is that the transfer of your primary residence to an LLC will most likely lose its homestead classification. In some states, maintaining your homestead exemption is extremely important. The loss of your homestead exemption can result in increased property taxes and the loss of the benefit of homestead creditor protection laws.

Customer:

Hi Shane,

Customer:

Taxpayer is not transferring the residence. It is a residence that will be purchased in the next year. Does this change any of the above?

Shane-CPA :

Hello...well it won't really make a difference. The only item to highlight that may not be relevant is the Section 121 exclusion of capital gain on primary residence $250,000 (if you're single) or $500,000 (if you're married) is set to expire at year-end. So that would be irrelevant to consider for future years unless Congress decides to extend the exclusion into future years. At this time it is not scheduled to be extended.

Shane-CPA :

The loss of the mortgage interest deduction and real estate taxes would still apply whether the primary residence is purchased by the LLC or transferred to the LLC.

Shane-CPA :

Most of the time I only recommend transferring a home to an LLC is if it will be used as rental property.

Shane-CPA :

In addition, the homestead exemption, if that matters to you, would still most likely not be applied whether the LLC purchases the primary residence or if it is transferred to the LLC.

Customer:

Very helpful. Thank you, Shane.

Shane-CPA :

You're very welcome! Thank you for allowing me to assist you. If you are completely satisfied with the service I provided you today, please provide me with positive feedback so that I may receive credit for my response. If you feel exceptional service was provided, bonuses are greatly appreciated. If I can be of further assistance, please let me know. Have a great day!

Shane-CPA :

Do you need assistance on ending the chat and finding the rating function? I can assist with this if you would like...

Shane-CPA
Shane-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 265
Experience: Shane Northrop is a Certified Public Accountant, Personal Financial Specialist and a Chartered Global Management Accountant
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Hi David...This is Shane CPA from Just Answer. I assisted you with your question a few days ago. I wanted to follow up with you to see if my response has met your needs and if there are additional questions I can help you with.

Please let me know if I can be of service to you at any time!

I look forward to hearing from you!

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Shane, CPA
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