Waldorf, MD asked in Real Estate Law, Tax Law and Business Law for Maryland

Q: I own a sngl-mbr LLC (reg'd in FL). I own a home in MD. I want to rent it entirely to my LLC to operate business. Legal?

Is it legal for me to rent out my Maryland state home to my LLC (Registered in FL)? My LLC's principle address is the same as my Maryland home, but now I want to rent the home entirely to the LLC and move out. I would live somewhere else, but use the home for business purposes only. Given the current economic issues, I do not want to sell the home for less than it is worth or less than I bought it for, but I still want to move, so this would be a great option for me if it is legal.

3 Lawyer Answers
D. Mathew Blackburn
D. Mathew Blackburn
Answered
  • Tax Law Lawyer
  • Englewood, CO

A: That's perfectly legal. You just have to be sure to set it up properly for tax purposes to make sure you're not creating additional tax while also charging enough to avoid a transfer pricing issue.

1 user found this answer helpful

Richard Sternberg
Richard Sternberg
Answered
  • Potomac, MD
  • Licensed in Maryland

A: I agree with Mr. Blackburn that it is perfectly legal, but I don't think it accomplishes what you are trying to accomplish. If the LLC you form is a passthrough entity with partnership taxation, then the formation is a wash. The rental income passes through to you after writing off the business expenses of the rental. If your LLC is formed as a taxable entity, like a C-Corporation, then you need to be much more careful about your accounting so that you distribute all of the income as either salaries or dividends, because you will pay tax on the retained earnings and you will pay employment as well as income taxes on the salaries you pay yourself. If your objective is to hold the property for rental income, you can equally hold the property as a sole proprietorship, partnership, or in a living trust and the accounting would be easier. If, however, your objective is limited liability because you wish to protect yourself from lawsuit regarding the property that are not covered by your insurance, an LLC with passthrough taxation is an appropriate device. In that case, be careful in the formation to avoid transfer taxes, recordation taxes, and income tax on the appreciation. Also, if you are new to being a residential landlord, get yourself a consult with a real estate lawyer, and don't even consider using the Montgomery County or Rockville City free lease form. They are way over-the-top pro-tenant.

1 user found this answer helpful

Cedulie Renee Laumann
Cedulie Renee Laumann
Answered
  • Crownsville, MD
  • Licensed in Maryland

A: "is it legal" might depend. If you are asking whether you can operate a business out of a residential address, that usually depends on the zoning. In some counties you will need to get a Zoning Certificate of Use before commencing any operations. In many counties, an owner-occupant without employees can operate a business if it does not involve retail or manufacturing, but the rules varies considerably and you'd need to check the county zoning code to get any kind of definitive answer.

As far as the rental component, sure, anyone can rent property they own to another person or entity. Of course you'd need to make sure that you'd properly report and remit taxes on all rental income. Whether it is wise to do so depends on the circumstances. You should be aware that using a home as a business rental can unwittingly open up capital gains tax on eventual sale since you may no longer be able to avoid capital gains on the first $250,000 of gain typically available for people selling a home they've lived in.

Another issue raised by your post is the registration -- if a FL entity is doing business in MD, it will need to register in MD as a foreign entity before it can do any business in this state.

There are a lot of reasons why it would be good to seek legal and/or accountant advice and you're encouraged to consider that -- an online post can offer general information but really can't take the place of talking through the specifics.

1 user found this answer helpful

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