Can You Buy a House With an LLC and Rent It To Yourself

A frequent question we get from our readers is whether it’s possible to purchase a home through their LLC and then rent it out to themselves, often with the goal of achieving tax savings or protecting their assets.

While this arrangement might seem clever on the surface — potentially allowing you to deduct expenses like mortgage interest, property taxes, and maintenance costs — the reality is far more complicated.

In this Can You Buy a House With an LLC and Rent It To Yourself article, we’ll break down why — even though it is possible — we advise against this arrangement in almost all situations.

Can You Actually Rent From Your Own LLC

The short answer to this question is: Yes, you can technically rent a house from your own LLC.

However, while it is possible to set up this arrangement, we almost always advise against it — particularly if you’re thinking about doing it as a means of paying less in taxes.

Not only are any tax savings you might seek to gain by doing this completely voided by IRS self-rental rules and fundamental principles designed specifically to prevent this, but attempting to do so could even create significant legal and financial complications for you later down the line.

Even in cases where asset protection is the goal, there are more effective solutions available that won’t put you at risk of IRS scrutiny or create unfavorable tax consequences.

Why This Strategy Often Fails

As touched on above, while the idea of purchasing a house and renting it to yourself through an LLC may seem appealing, there are a number of key reasons why this approach isn’t recommended.

Since most of our readers considering this approach are planning to live in this rented property — as opposed to using it for business purposes — the most obvious reason for which you couldn’t receive any tax benefits is that it would fail the IRS’s “economic substance doctrine”.

This common law doctrine, which is laid out under Section 7701(o)(5)(A) of the Health Care and Education Reconciliation Act of 2010, states that “tax benefits with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose”.

In other words, the IRS won’t allow this rental transaction between your LLC and you to receive tax benefits unless there’s a legitimate business reason (e.g., the property generates income through legitimate rental business or other activities) — which there won’t be if you’re renting it for personal use.

As such, while you would theoretically be able to do so, it would arguably be quite pointless as any potential tax benefits will be disregarded, meaning it would be the same as just buying or renting it in your own name.

Potential Financial and Legal Challenges

Perhaps the most worrying aspect of using this strategy is that on top of not actually being able to obtain the tax benefits you seek, it’s likely to leave you worse off both financially and legally.

We’ve broken down the key reasons for why this is the case in the sections below.

Additional IRS Scrutiny

One of the primary problems with renting to yourself through this setup is that the IRS may view it as “self-dealing”, whereby you’re attempting to manufacture tax deductions through transactions that lack legitimate business purpose.

This is problematic because it can result in serious fines, back taxes (with interest), and even criminal charges for fraud if it comes to light that you’ve been intentionally misleading state or federal tax authorities.

Phantom Income

Even if you don’t find yourself in hot water legally, you’ll still likely be worse off financially due to the “phantom income” your LLC would be generating.

This term refers to income that is reported as taxable by the IRS but does not result in actual cash in hand for the taxpayer — or in other words, income which you technically “earned” and owe taxes on, yet did not receive in liquid form.

In this example, the phantom income earned by your LLC would be the rent you’re “paying”, as this is treated as taxable income for the LLC. However, since you’re both the tenant and the LLC owner, this income won’t represent new money for you personally, leading to a tax burden without a cash gain.

Capital Gains Taxes

Another potential financial burden you’ll likely be faced with is higher capital gains tax, if you decide to take advantage of “depreciation deductions” offered to LLCs.

In the context of an LLC-owned property, this refers to tax deductions the IRS lets an LLC make for a portion of a property’s value (excluding the land) in order to recover the cost of its wear and tear, deterioration, or obsolescence over time.

While this reduces the taxes owed on rental income in the short-term, it will also require you to pay more in capital gains tax when you eventually sell the property, as the taxable profit on sale will be much higher.

By contrast, most people who own their houses personally are able to sell their primary residences tax-free — this is because the IRS allows individual homeowners to currently deduct up to $250,000 in capital gains from the sale of these properties, and up to $500,000 for married couples filing jointly.

Piercing the Corporate Veil

Another significant risk you’ll need to watch out for with this strategy — especially if you’ll be renting the property to yourself for personal use — is the potential for “piercing the corporate veil”.

This is a legal term that refers to what happens when courts determine you haven’t maintained proper separation between your LLC and personal finances — which is particularly likely to occur in a self-rental situation where you’re acting as both the landlord and tenant.

If you fail to keep adequate records, maintain separate bank accounts, or properly document rental payments and business transactions, courts may decide your LLC is merely an extension of your personal finances — which would allow creditors to pursue your personal assets. 

Problems Financing the Purchase

Before you even get to the potential issues of renting to yourself, you’ll likely encounter challenges with the initial purchase of the property if you plan to use anything other than cash.

While cash purchases aren’t an issue, traditional lenders will typically require you to close in your personal name rather than that of your LLC’s.

Although some community lenders offering portfolio loans might be willing to let you close directly within the LLC, these loans usually come with considerable drawbacks — including higher interest rates, larger down payments, and much stricter qualification requirements.

When This Approach May Work

While we generally advise against using an LLC to rent a house to yourself for personal use, there are some limited business scenarios where a similar arrangement might make sense — though these likely aren’t what most people are considering when they ask about this strategy.

For example, if you own multiple businesses, you might consider having one LLC own a property and rent it to another LLC for legitimate business purposes — thereby separating valuable real estate assets from business operations and preventing creditors from being able to pursue them for any business liabilities.

However, this is a complex arrangement that requires careful structuring and documentation to ensure it meets all legal and tax requirements. Even if you manage to structure it correctly, using a trust often provides superior asset protection without the tax complications and legal risks associated with it. 

Can You Buy a House With an LLC and Rent It To Yourself FAQs