I own a duplex, Would I be able to incorporate myself and then, rent from myself? Tax benefits would be great

Question

I am thinking that if I could do the above, my home repairs, and many other expenses would be tax deductible come tax time :)

Answer 1

Well, you may be able to get away with if you make it appear legitimate, but in principle I don't think IRS would allow it. Besides, it's really not benefical to do so. In order to make it look legit you will have to charge yourself market rent, then report the rental income on Schedule E: Rent and Royalty. If you don't, it may riase a red flag where IRS may want to take a closer look at the situation.

You will be able to deduct the mortgage interest for now (like a homeowner) but there's been times where congress disallowed or limited deduction of mortgage interest on investment property.

You may be able to write off maintenance repairs but any major improvements on the house would have to be capitalized and depreciated over 39 1/2 years. You may be able to claim a sec. 179 deudction on any capital improvements (sec 179 allows you to write off cost immediately instead of depreciating) but it will be limited to your profits from rental income (you can't go below $0 and show a loss after the deduciton). You will also have to pay taxes on any capital gains when you sell your house and will lose the $250,000 cap. gain exlusion homeowners have. As a homeowner, you won't get an immediate benefit from home improvements BUT, you will be able to add that to your cost basis of the house when calculating your capital gains (Example: if you spent $30,000 to remodel your kitchen, you can tack the cost to your original purchase price, increasing your basis and reducing your gain when you sell).

Capital gain is a big deal in this stuation. If you're in the 25% tax bracket and yoiu sold the home for $100,000 profit, as a corporation would have to pay $25,000 tax on the gain. As a homeowner, you have a $250,000 capital gain exlusiong so you won't owe any tax (as long as you buy another home within 6 months).

In short, you may save a couple hundred in repairs, but in the long run it will cost you thousands of dollars.

Answer 2

Actually you would pay MORE tax overall. The rent you pay would be taxable to the corporation, but not deductible on your personal return. The corporations net income would be taxed as 'earned' and anything you take out would be taxed again as dividends. You would also lose the $250,000 capital gains exclusion when you the corporation sells the home. Add the cost of incorporating and filing an extra tax return. The net 'benefits' are an expense.

Answer 3

Yes, you can start a corporation, sell your duplex to your corporation, and rent from yourself. However, there is a lot of extra record-keeping involved with incorporation. It would be worth buying 30-60 minutes of an accountant's time so he or she could walk you through the ramifications of your proposal. Then you are making an informed decision and you won't be getting cranky letters from the state or the IRS looking for missing forms and tax payments.

Answer 4

Why do people always talk about incorporating "themselves"? The whole point of incorporating is to SEPARATE your business from yourself.

On a second thought, that's a Freudian slip. The IRS will not treat it as a corporation because they will look through your little tax scheme and treat it as null and void, putting the "yourself" back into the picture.

Answer 5

There are a number of "tax help" books that are published annually. When I worked for E&Y, they used to publish the Ernst & Young Tax Guide. I would think they still publish it every single year. That would be a big help in deciphering the tax code in simpler language than the various IRS publications. Also, since it is in one book, rather than a number of different publications, it would be an easy reference.

Answer 6

You'll very possible pay more to incorporate, then pay annual corporation fees and corporate taxes, than you'd save if you could deduct some additional expenses.

Think about it - if it was that easy, wouldn't many people be doing it?

Answer 7

You would have to create a corporation, then sell the house to the corporation. It would involve a getting a new mortgage in the company's name. You can't just incorporate yourself to achieve what you want.

Answer 8

but wouldn't your rent be income to pay tax on??

Answer 9

No.