The idea sounds perfect: Put your house in an LLC, have your business pay rent to that LLC and deduct the whole thing.
I asked ChatGPT if this actually works and the answer was basically no, not the way people think it does.
You Can’t Just Pay Yourself Rent
Here’s the scenario people imagine. You transfer your primary residence into an LLC you own. Your business pays rent to that LLC. You deduct the rent as a business expense. Tax savings unlocked.
ChatGPT explained that the IRS looks at substance over form. If you live in the home personally, it’s a personal expense no matter what entity owns it. Rent paid to an entity you control for your own personal use isn’t deductible. You’re just moving money from one pocket to another while creating extra tax filings.
There are also real downsides. You might lose the capital gains exclusion on your primary residence, which can be worth $250,000 for single filers or $500,000 for married couples. Your mortgage lender probably won’t allow it. Property insurance becomes more expensive for commercial coverage. Some states reassess property taxes when ownership changes.
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What Actually Works: Home Office Deduction
If you use part of your home regularly and exclusively for business, you can take the home office deduction. This is the straightforward route.
You have two options. The simplified method uses a flat rate per square foot. The actual expense method calculates your portion of mortgage interest, utilities, insurance and other costs. Both are legitimate and don’t require setting up an LLC.
The Augusta Rule Exception
This is where things get interesting. Section 280A allows your business to rent your personal home for fewer than 15 days per year. If the rental is for legitimate business purposes at fair market rates, your business deducts the rent and you report zero rental income personally.
This works for board meetings, strategy sessions or client events held at your home. It has to be documented properly, charged at market rate and used for actual business activities. People use this legally all the time, but it requires real business justification.
Separate Rental Properties Are Different
If you own a rental property that’s not your personal residence, an LLC structure makes sense. The LLC reports rental income and you deduct mortgage interest, depreciation, repairs and other expenses. This is standard real estate investing and has nothing to do with trying to deduct your own housing costs.
The Real Risks
ChatGPT laid out why putting your personal home in an LLC often backfires. You lose homestead protections in some states. The capital gains exclusion disappears. Lenders typically prohibit transferring mortgaged properties into LLCs without refinancing. Insurance costs go up because you need commercial coverage instead of homeowner’s.
Most importantly, it doesn’t automatically create tax savings. If your goal is asset protection, an umbrella insurance policy might be simpler and cheaper than restructuring ownership.
What This Means
You can’t manufacture a tax deduction by shuffling paperwork around your own residence. The IRS isn’t that easy to fool and the complications usually outweigh any perceived benefit.
If you want to lower your taxes, the home office deduction and Augusta Rule are the legitimate routes. If you want asset protection, talk to an attorney about whether an LLC actually helps your situation. If you’re building a rental property portfolio, separate investment properties in LLCs work fine.
The bottom line is that owning your home in an LLC doesn’t unlock secret deductions. It mostly creates headaches.
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This article originally appeared on GOBankingRates.com: I Asked ChatGPT If You Can Own Your Home in an LLC and Deduct Rent — Here’s What It Said
