Can I Put My Primary Residence in an LLC to Claim Depreciation on Rental Portion?

Setting up an LLC for your primary residence won't change how the depreciation is treated for tax purposes. The IRS looks at the substance of the transaction, not just the form. Since it's still your primary residence with a rental portion, the tax treatment follows the activity, not the entity structure. The depreciation on the rental portion will still be reported on Schedule E, and the same passive activity loss rules would apply. Since your combined income exceeds $150,000, you're already subject to the passive activity loss limitations, and simply creating an LLC won't bypass those limitations. What you might want to explore instead is whether you qualify as a real estate professional, which could allow your rental activities to be treated as non-passive. This requires working 750+ hours annually in real estate activities and more hours in real estate than any other occupation.

I was in almost the exact same situation last year and discovered taxr.ai through a friend. I uploaded my previous tax returns and mortgage docs and got a detailed analysis about my options for my primary residence that's partially rented. https://taxr.ai really helped me understand the implications before talking to my accountant. The tool showed me that creating an LLC for my primary residence wouldn't bypass the passive activity loss limitations, but it gave me other strategies to maximize my tax benefits from the rental portion. It highlighted some overlooked deductions I wasn't taking and explained exactly how the depreciation recapture would work in different scenarios.

Just wanted to follow up about my experience with taxr.ai after my skeptical question earlier. I decided to give it a try with my vacation property that I rent out part-time. I was honestly surprised by how detailed the analysis was! It identified that I was under-depreciating some capital improvements and showed me how to correctly allocate expenses between personal and rental use. The document analysis was impressive - it caught details in my mortgage statements that I'd completely missed. I took the report to my accountant last week, and she was able to file an amended return that's getting me an additional $2,300 back. Definitely worth checking out if you're dealing with rental property tax questions.

Since you're having trouble getting through to a tax professional for personalized advice, you might want to try Claimyr. I was struggling to get answers about my rental property situation from the IRS for weeks - constant busy signals and disconnects. Found https://claimyr.com and they got me connected to an actual IRS agent within about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with clarified that simply transferring your primary residence to an LLC doesn't change the passive activity loss limitations. However, she pointed me to some specific sections of the tax code about mixed-use properties that my accountant had overlooked. Ended up saving me a bunch in taxes by properly calculating my basis and depreciation.

I need to eat some humble pie here. After posting that skeptical comment about Claimyr, I was still desperate to get through to the IRS about my rental property situation, so I tried it anyway. I'm shocked to report it actually worked exactly as advertised. I got a call back in about 25 minutes and was connected to a real IRS agent who answered all my questions about depreciation recapture on a partially rented primary residence. Saved me from making a costly mistake on my return. The agent even emailed me the relevant publication sections afterward. Never been so happy to be wrong about something!

One thing nobody has mentioned yet - if you put your primary home in an LLC, you might lose your homestead exemption depending on your state. In Florida, this cost my brother thousands in additional property taxes when he tried a similar strategy. You also need to consider whether your mortgage allows transfer to an LLC - many have due-on-sale clauses that could be triggered. Another consideration is insurance - you'll likely need to switch from a homeowner's policy to a landlord policy, which is typically more expensive. The modest tax benefits you might get (if any) could be completely wiped out by these additional costs.

Has anyone considered cost segregation for partially rented primary residences? I did this last year and was able to accelerate depreciation on certain components of my rental portion (appliances, carpet, fixtures) instead of depreciating everything over 27.5 years. Increased my paper losses significantly.

The LLC structure won't help you bypass the passive activity loss limitations since the IRS focuses on the substance of the activity, not the entity form. However, there are a few other strategies worth exploring for your situation. Since you're already maximizing depreciation on the rental portion and plan to pass the property to your kids, consider whether the current tax benefits outweigh the depreciation recapture you'd face if you ever sold. The stepped-up basis strategy you mentioned is solid for estate planning. One often overlooked opportunity is ensuring you're capturing all allowable expenses for the rental portion - home office deductions if you use part of your space for rental management, travel expenses to purchase supplies, etc. Also, make sure you're properly allocating utilities, maintenance, and insurance between personal and rental use. Given your income level, you might also want to explore whether either you or your spouse could qualify as a real estate professional by documenting time spent on rental activities. Even if it's just property management, maintenance coordination, and tenant screening, those hours can add up. The 750-hour threshold is more achievable than many people think when you properly track all real estate-related activities.

I've been following this thread with great interest as I'm in a very similar situation - primary residence with rental income that exceeds the passive loss limitations. One strategy that hasn't been mentioned yet is potentially converting your current setup into a legitimate boarding house or bed & breakfast operation. If you can document that you're providing substantial services to your tenants (daily cleaning, meals, utilities management, etc.), the rental income might be reclassified as active business income rather than passive rental income. This would allow you to deduct losses against your other income regardless of the $150k threshold. The key is that you need to provide services that go beyond what a typical landlord provides. Things like furnished rooms with daily housekeeping, shared common areas you actively maintain, or meal preparation can help establish this as an active business rather than passive rental activity. Obviously this changes the nature of your living arrangement significantly, and you'd need to check local zoning laws and HOA restrictions. But for the right situation, it could be a way to legitimately convert passive losses into active business deductions while keeping the property in your name for the eventual stepped-up basis benefit you're planning for your children.