Both Diane and I have seen this idea come through on numerous occasions throughout the years. Create a C Corporation, put your home into the C Corporation, and have the C Corporation pay the mortgage and all your bills and lifestyle expenses. Why? Because, according to the folks pushing this scheme, it’s reasonable that your business provide you with suitable living arrangements so you can represent the company in its best light. Maybe you need to meet with clients, and use a custom-built home office for that purpose.
The truth is, your business can pay your mortgage directly, but you’re going to pay dearly for that privilege.
- If your business owns the property, then you lose all your deductions. You can’t take a homeowner’s interest deduction, or any of the other deductions you take now.
- You lose the ability to homestead your property. Homesteads must be in your personal name.
- You lose the ability to claim the gains exemption of up to $500,000 (for living in your home for 5 consecutive years or more).
- The property is now being held as an appreciating asset in a C Corporation. That means every dollar of profit made by the sale of the house will be taxed, and as corporations don’t have capital gain tax rates, it’ll be ordinary income.
- You may have put your house at risk. You can’t always protect your shares in a C Corporation from a personal claim against you.
But wait, there’s more!
If your business owns your home, not only do you lose all of the deductions and tax savings, you even get to pay more on top of that. You see, once the business is paying that mortgage, it becomes a taxable fringe benefit … to you personally. Now that $1,500 or whatever per-month mortgage amount is being added to your W2 at the end of the year and is taxed at your personal rate.
I’ve seen that argument applied to hair, clothing, jewelry and cosmetics as well. People need to be well turned out and presentable to represent the company. Again, the same logic applies – unless you’ve got some very unique circumstances, all of that stuff is going to be treated as a taxable fringe benefit to you.
On the other hand, if you want asset protection for your home there are some very good ways to get it done.
Consider using a disregarded LLC (an LLC owned by 1 person or a married couple filing a joint return). You’ll get asset protection, even from most personal creditors, and no need to file a tax return. Plus you keep all your deductions and the right to take the gain exclusion.
Or, consider filing a homestead exemption on your property, if you live in a state that makes homesteading worth your while. Some states allow you to protect your whole home, no matter how much it cost or is worth.
The idea of a cost-free lifestyle is a mistaken belief we want to believe in – after all, it sounds great. Sadly, the truth is anything but. Even unwinding this kind of transaction can cost you, in time, recording fees and/or transfer taxes. If you’ve heard about an idea or strategy that sounds great, run it past your CPA or tax preparer first. And if you don’t have a CPA or tax preparer, why not contact Richard@USTaxAid.com and join one of our tax preparation programs for business owners and investors? With our programs, you pay a low monthly amount to get your returns prepared … plus you can ask all the questions you like, without getting an extra bill.