When Primary Homes Become Investment (Rental) Properties

Did you buy a new home and can’t sell your old one because of the depressed real estate market?

Do you know someone who was forced to relocate for a new job but cannot sell their home?

These scenarios are increasing for a number of reasons; and with that, more and more people are becoming accidental landlords. Most, however, are not aware of some of the possible consequences when you go from having what is considered a primary home to an investment property.

First of all, whenever you have investment (rental) property, this property should be excluded from the rest of your assets by way of setting up an LLC. The LLC protects individual owners from personal liability, and for federal income tax purposes, the owner can ignore the LLC when they complete their tax returns (making it easier and less expensive come tax time). The LLC exists separately but the owners can take the losses and gains from the investment directly on their individual tax returns. For these reasons, most real estate investors, which is what you are now, choose to hold title to their real estate investments in an LLC.

The process may seem simple but it is important to get the job done right because if the LLC is set up or the property is transferred improperly, it can cause major headaches down the road and even potential litigation.

To start the transaction, you set up an LLC, and then transfer the title to the property from you, personally, to the LLC. There are other items to complete, the details of which are too great for this general article.

While becoming an accidental landlord can have liability exposure, there are also tax consequences, including a reversal of your homestead exemption, which is now known in Michigan as the primary residence exemption. Further, by no longer maintaining your home as your primary residence, you may be limited in deducting mortgage interest expense as you may be used to doing on your tax returns.

I suggest contacting your attorney and/or tax professional to fully discuss and understand the complexities of these tax issues.

Please also keep in mind there are many landlord-tenant laws that must be followed if you have a tenant in your home; and failure to comply may result in severe penalties and litigation.

A few of the laws that you must be familiar with: Michigan’s Truth-in-Lending Act, Security Deposit Act, Landlord and Tenant Relationships Act and the Michigan Consumer Protection Act.

You must not be fooled by the supposed simplicity of a residential lease form that you can purchase from the local office supply store. These uniform leases are produced for states throughout the country and do not address specific requirements of the landlord tenant laws of Michigan. Some townships and cities even have specific requirements to protect their citizens, so you must be informed. I recommend contacting a landlord-tenant lawyer to assist you. The upfront investment will save you money and headaches in the future.

Whether you intended to become a landlord or fell into it because you had no other choice, there are consequences that many people fail to consider. Please be informed. We would be glad to assist you with setting up a real estate holding LLC, or advise you of any landlord-tenant, tax or real estate issues.

Curtis & Curtis, P.C. is a full service law firm located in Jackson, Michigan providing superior legal services and advice to individuals, families and businesses throughout mid-Michigan since 1901.

This publication is provided for general informational purposes only and does not constitute formal legal or other professional advice. No attorney-client relationship is created with you when you read this information. The above information may be changed without notice and is not guaranteed to be complete, correct or up-to-date, and may not reflect the most current legal developments. If you have any questions or need assistance, please contact Curtis & Curtis, P.C.