Can I Legally Convert My Primary Residence to Rental by Selling To My Own S-Corp?

This is a great question about a somewhat advanced tax strategy. The short answer is that yes, this can be legitimate, but it comes with several important caveats and potential pitfalls. When you sell your primary residence to your own S-Corporation, you're essentially creating a related-party transaction. The IRS scrutinizes these types of transactions carefully. For the strategy to work properly, the sale must be legitimate and at fair market value – you'll need a professional appraisal to establish this value. You can potentially benefit from the Section 121 exclusion ($500K for MFJ) on the sale if you've lived in the home as your primary residence for 2 of the last 5 years. Your S-Corp would then have a higher depreciable basis than if you had simply converted your personal residence to a rental. As for using an LLC instead of an S-Corp, it depends on how your LLC is taxed. If it's a single-member LLC taxed as a disregarded entity, this strategy won't work because it would be like selling to yourself. The LLC would need to be taxed as an S-Corp or C-Corp to establish a separate legal entity for tax purposes.

I went through this exact same situation last year and found an amazing resource that helped me understand all the ins and outs of this process. I used https://taxr.ai to analyze my specific situation and determine if selling my primary residence to my S-Corp would be beneficial. The tool helped me understand that while the strategy can work, it's not as simple as just transferring ownership. It helped identify several issues I hadn't considered - like the fact that my S-Corp needed to have a legitimate business purpose beyond just holding my former residence, and that I needed to charge market-rate rent to avoid having it classified as personal use. They have specific templates and calculators for rental property tax strategies that were super helpful in showing me how the numbers would actually work out in my situation.

Just wanted to update that I checked out https://taxr.ai after my skeptical comment above. I was really impressed with the depth of analysis they provided for my situation. They identified that in my case, because of the timing of my purchase and current market conditions, I would only gain about $45k in depreciable basis by using the S-Corp strategy, which wouldn't be worth the complexity and costs involved. They suggested an alternative approach using a cost segregation study on the property after conversion that would actually accelerate more depreciation in the early years without the complexity of the S-Corp sale. Saved me from going down a complicated path that wouldn't have paid off in my specific circumstances!

One thing nobody's mentioning here is how impossible it is to get actual help from the IRS on complex questions like this. I tried calling them about a similar strategy (putting rental properties in an LLC) and was on hold for HOURS before getting disconnected. When I finally got through after trying for days, the person couldn't even answer my basic questions. I finally had success using https://claimyr.com to get through to an actual IRS representative who could help. You can see how it works here: https://youtu.be/_kiP6q8DX5c. It saved me so much time and frustration. They basically call the IRS for you and when they reach a human, they call you to join the call. I got through in about 45 minutes versus the 3+ hours I was spending on hold. The IRS agent I spoke with couldn't give specific tax planning advice but was able to point me to the right publications and clarify some reporting requirements for related-party transactions.

Well I'll be damned - I tried that Claimyr service after being so skeptical above. It actually worked! I'd been trying to get through to someone at the IRS about related-party transaction rules for three days with no luck. Used the service and got connected to an IRS rep within an hour. The IRS person explained that selling to my own S-Corp would be considered a related-party transaction under Section 267, which means I needed to be careful about several things. They confirmed that while the strategy can be legitimate, it needs to be properly documented with a real business purpose, market-rate rent, and proper corporate formalities. Saved me from potentially making some serious mistakes in how I was planning to structure things. Worth every penny for the time saved alone.

Something important that hasn't been mentioned yet: if your property has appreciated significantly, selling to your S-Corp means the S-Corp will have a much higher property tax basis in many states. I did this in California and didn't realize it would trigger a reassessment for property tax purposes, which nearly doubled my annual property taxes! Make sure you understand all the non-federal tax implications too. Some states might have transfer taxes or other considerations that make this strategy less attractive.

Has anyone used TurboTax to handle the reporting for this kind of transaction? I'm dealing with this exact situation but not sure if regular tax software can handle it properly or if I need to hire a CPA.

I'd strongly recommend getting professional help for this type of transaction. While the strategy can work, there are several critical considerations that need to be handled correctly: 1. **Business Purpose Documentation**: The IRS will scrutinize whether your S-Corp has legitimate business purposes beyond just holding your former residence. You'll need to document these purposes clearly. 2. **Fair Market Value**: You must sell at true FMV - get a professional appraisal. The IRS can challenge related-party transactions if the price seems artificial. 3. **Corporate Formalities**: Your S-Corp needs to operate as a real business entity - separate bank accounts, proper meetings/resolutions, market-rate rent if you continue living there, etc. 4. **Mortgage Complications**: As others mentioned, most residential mortgages have due-on-sale clauses. You'll likely need commercial financing for the S-Corp. 5. **State-Specific Issues**: Property tax reassessment, transfer taxes, and state-level reporting requirements vary significantly by location. The potential benefits can be substantial if you have significant appreciation, but the compliance requirements are complex. A qualified CPA experienced with real estate transactions and S-Corp structures is essential - don't try to navigate this alone with tax software.