LLC holding personal residence

[WICPA]

Had a new client come in. On prior year tax return he had personal return plus 1065 for an LLC in which him and wife are partners. On the 1065 return there are three properties. A rental property, their personal residence, and another piece of land they own. My first question is why he would hold all three properties inside the same LLC considering liability issues. He had me contact the attorney who set it up. The attorney told me it was set up for Medicaid/ Nursing Home purposes. The attorney told me the Membership agreement states that client and spouse are responsible for property taxes etc. allowing them to deduct taxes on their personal return.

First, I'm not sure this would pass the Medicaid test as being shareholders of the LLC, it is basically their property but I do not practice law so that is not my department. My concern is this. Since they live in the property and pay taxes, utilities and repairs. Should those payments be treated as rent income to the LLC? I know if I own a property that I let someone else live in any payments they make regarding expenses is rent income to me since they are paying on my behalf. Has anyone else dealt with this situation?

[TaxGuyBill]

I would advise the client to get a second opinion from another attorney, and/or I would probably not accept that client.

I suspect these rules might vary due to State law, so won't be dogmatic about anything, but it seems like a bad situation to me. There are situations where a situation is treated differently for different purposes (for example, Medicaid versus tax returns), but this seems like trouble to me.

*IF* the LLC is treated as a separate thing, yes, putting the home in the LLC could keep it out of Medicaid qualifications. But *IF* the LLC is treated as a separate thing for tax purposes, how can the taxpayers deduct real estate taxes if they taxpayers do not own it (the Membership Agreement would not affect that)? As you say, *IF* the LLC is treated as a separate thing for tax purposes, it would seem to be rental income.

Also, *IF* the LLC is treated as a separate thing, the taxpayers may not qualify for the $250,000/$500,000 §121 exclusion if the property is ever sold.


As I said before, it may depend on State law (each State treat LLCs differently), but my first thought is that it seems like trouble.

[TAXNJ]

Had a new client come in. On prior year tax return he had personal return plus 1065 for an LLC in which him and wife are partners. On the 1065 return there are three properties. A rental property, their personal residence, and another piece of land they own. My first question is why he would hold all three properties inside the same LLC considering liability issues. He had me contact the attorney who set it up. The attorney told me it was set up for Medicaid/ Nursing Home purposes. The attorney told me the Membership agreement states that client and spouse are responsible for property taxes etc. allowing them to deduct taxes on their personal return.

First, I'm not sure this would pass the Medicaid test as being shareholders of the LLC, it is basically their property but I do not practice law so that is not my department. My concern is this. Since they live in the property and pay taxes, utilities and repairs. Should those payments be treated as rent income to the LLC? I know if I own a property that I let someone else live in any payments they make regarding expenses is rent income to me since they are paying on my behalf. Has anyone else dealt with this situation?

Your concerns and questions should be addressed to the attorney you mentioned who knows why the LLC was formed.

Think the first question to the attorney is to ask if they are a Certified Elder Law" attorney. If yes, ask when setting up the LLC, if tax implications were considered and the IRS code sections and references related to your questions.

[WICPA]

I did address the attorney and he was somewhat vague but promised to send me the operating agreement along with some other information which I have yet to receive. The client is on hold as I decide whether to move forward with him or not. The feedback I have received here along with a couple of colleagues tells me I am correct to question the setup.

Thanks for the replies.

[Dude]

So the barrister is helping these folks protect their primary residence which does not need to be protected, by forcing them to pay rent to the LLC which in turn will require them to pay taxes on said rent as income. Shrewd

[DaveinTexas]

I’m with Bill, if that LLC is treated as a separate tax entity (Partnership or Corp), the step up in Basis and the 121 exclusion could be lost. I’d get that personal residence out of there pronto, if I were the TP.

Sounds like the TP was looking for a way out of the $10,000 cap on property taxes perhaps? I hear these commercials on the radio a lot, “Are you a business owner, rental periphery owner, or a home owner? You need an LLC.” I still haven’t figured out why a homeowner needs an LLC.

But, my state has favorable laws regarding debtors and their ability to keep the equity in their home safe, without the need of a separate legal entity.