Want to make money by renting out your home? If done correctly, this can boost your cash flow with minimal effort. Selling your home to your S corporation is one of the best strategies. Here’s why it’s better than just converting your home to a rental property.
The Benefits
Selling your home to your S corporation offers two major benefits:
- Tax-Free Profit: Use the home-sale profit exclusion to avoid taxes on up to $250,000 ($500,000 if married).
- Increased Depreciation: The sale increases the rental property’s depreciable basis, leading to bigger yearly depreciation deductions.
Example: You and your spouse bought your home for $250,000 20 years ago. Now, it’s worth $750,000. Selling it to your S corporation means you can avoid taxes on a $500,000 gain. This boosts the property’s basis, giving you higher depreciation deductions. In the first three years, you could deduct an additional $53,788 in depreciation, saving you $19,902 if you’re in the 37% tax bracket.
Addressing Concerns
Concern 1: Increased Property Taxes If property taxes increase after the sale, it’s usually a small amount compared to the tax savings from the sale. For example, even if taxes go up by $8,000 annually, you saved $140,000 in federal and state taxes from the sale. It would take 35 years of higher property taxes to negate this benefit.
Concern 2: Losing Homestead Exemption The homestead exemption reduces property taxes on your primary residence. However, converting your home to rental property already eliminates this exemption, so selling to your S corporation doesn’t change that.
Concern 3: IRS Scrutiny Selling your home to your S corporation won’t automatically trigger an IRS audit. Follow standard procedures: get an appraisal, transfer the title properly, and document everything. This ensures you comply with tax laws and have nothing to worry about.
Takeaways
Selling your home to your S corporation before renting it out can save you money on taxes and increase your rental property’s depreciation deductions. Even if property taxes rise, the overall benefits usually outweigh the costs. The homestead exemption and related-party sale concerns are minimal if handled correctly.
Caution: there are important limitations on how much you can deduct in any one year, depending on your equity in the company. The rules are complicated, and many times, this may not work. Please contact us to discuss further details.