Converting Residental Property to a Care Home

[GTS1101]

I have a client who is going to be moving out of their residential home and converting it to a care home using it as a business. An LLC is going to be setup to run this business. My client will still own the home and she and her husband are going to be the LLC owners. My client would like to lease the home to the LLC business. Therefore my clients would report this as income and the LLC would be able to write off a lease expense. I have never heard of someone doing this before. Would my client report the income from the LLC for the lease of the property as SCH E rental income as she would be renting/leasing the home to the LLC to be used as a care home? And then the LLC would get to write off the lease expense to lease the property?

Thanks!

GTS1101

[S T]

Self Rental

If I am understanding your post, Wouldn't the self rental rules apply.

Your client owns the home, but sets up an entity as a business and then rents/leases to himself?

Sandy

[BOB W]

TTB says:

Self-Rental Rule
If a taxpayer rents property to an activity in which the taxpayer
materially participates, any net rental income for the year is
treated as nonpassive income, while any loss is treated as passive.
The effect of this rule is to not allow self-rental income to offset
passive losses.

Court Case: In a Tax Court case, married taxpayers owned and materially
participated in two S corporations. The taxpayers rented real estate
to the corporations. The taxpayers realized a gain on one of the rental
properties, and a loss on the other rental property. Tax Court determined
that even though the two activities did constitute an appropriate economic
unit under IRC Section 469, under the self-rental rule the gain was
nonpassive. The passive loss was not available to offset the passive
gain. The gain was taxable, and the loss was nondeductible.