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My wife and I just purchased a house in Seattle, WA, we are living in the main floor and planning to rent the basement through Airbnb. We also planning to setup an LLC for Airbnb to reduce the liability risk. I would appreciate your help for my questions:
We already purchased the house under our personal name, should we transfer partial of the house (basement) or the whole house to the LLC to reduce the liability risk?
If yes to question 1 (transfer partial or whole house to LLC), what will be the tax consequences? will this transfer affect our principal residence tax benefit ($500,000 tax free capital gain when sell this house)?
The tax and legal advice you get for free on the Internet is worth what you pay for it.
For the liability question, talk to an attorney or your insurance agent, but be warned that some home insurers will cancel if they find out you’re doing AirBnB.
For the tax question, you should ask your tax preparer or a tax attorney.
I am not a lawyer or a tax specialist. I have just found that when you need advice that could prevent losing money, it’s worth spending a little to get expert advice.
Most advice here will wisely refer you to a professional. The lawyer and accountant should be fine. However, be sure to get an insurance agent who understands short term rental. My usual agent was a nightmare when it came to this need.
The biggest sticking point is that you trying to move part of the house into an LLC. I’ve never heard of anyone being able to do that. I don’t believe there is a mechanism to legally title part of the house separately from the rest.
You might be able to rent the basement to the LLC, but then you pay taxes on the rent the LLC pays you.
You may have to title the whole house to the LLC, then rent the top back to yourselves. An S-corp or a C-Corp may be better for this.
Definitely talk to an experienced attorney, particularly one familiar with tax law, or do hours and hours of online research.
In the U.S., LLC as a business entity is separate from treatment as a tax entity. Agree you should get professional advice.
You can have an LLC treated as a Schedule C business on your personal income tax return if both spouses each have a Schedule C, or if one spouse is an employee of the other. There can be certain advantages with regard to health insurance, retirement accounts, etc. if employing family members. If you go that route, you may be able to have a dedicated portion of the property as an STR without a change in ownership. Depending on how you manage personal days and the configuration/use of the STR space, you may be able to deduct expenses (portion of mortgage, property tax, utilities, maintenance and repair, supplies, etc.) as you would for any business, or your deductions may be limited.
Particularly inquire with an attorney as to whether the LLC structure really reduces your liability. And, as others have noted, make sure you have appropriate insurance.
I would think treatment as Schedule C under LLC registration would be less complicated all around. Partitioning the house and either renting back a portion as your residence or renting a portion of your home to the business is really adding complexity and demands legal and accounting advice. Also, be aware your locality may have zoning and other requirements that would prohibit or constrain commercial property as part of a residential home.
Switching from personal residence to rental (investment) property is less problematic than switching from investment property to personal residence with regard to capital gain exclusion at sale, but that applies to an entire property. Utilizing a portion of the residence as a rental may preserve the exclusion in its entirety, or may require the sale to be treated as two distinct sales, with the business property not qualifying for the capital gains exclusion. See Home Sale Exclusion | H&R Block Again, professional advice is essential here.
For discussion purposes only, not professional tax advice.
I suspect it can be done by turning the home into a multi-family home (e.g. a duplex), but I bet it opens up a huge can of worms with zoning, building codes, and HOA rules.
