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.

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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.