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I can't find anyone who's done this, so I assume it doesn't work, but don't know why not.

Let's say I'm going to buy a home. Instead, I create an REIT, the REIT buys the home, and I pay rent to the REIT to rent the home.

What's the disadvantage to this setup? I also imagine, it could have some advantage, tax-wise.

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    What benefits are you expecting? One disadvantage is that you don't know what you are doing and end up with higher taxes and/or penalties for something. – D Stanley Mar 2 '17 at 17:29
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    Also REITs must have many investors, so unless you have a lot of people willing to participate with you I don't know that it's possible. Are you maybe thinking of a self-directed IRA? – D Stanley Mar 2 '17 at 17:30
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    @DStanley Don't even suggest anything to the OP about self-directed IRAs because buying a house within an IRA and then leasing it to oneself is about as close to a Prohibited Transaction that one can get. – Dilip Sarwate Mar 2 '17 at 18:40
  • @DilipSarwate I agree completely which is why I asked the question (to be fair I did not suggest it) – D Stanley Mar 2 '17 at 18:45
  • Why is this question being downvoted? It's on topic and hasn't been asked before. – Nosrac Mar 2 '17 at 19:02
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What's the disadvantage to this setup?

  • You lose your mortgage interest and state and local tax deductions. Note that the state and local taxes that are deductible include taxes unrelated to your mortgage.
  • As already posted, you lose the capital gains tax exemption.
  • You'd lose any first time home buyer credit on this house.
  • You'd lose any homestead exemptions (if any) on your property taxes.
  • You'd lose gentrification protections (if any) on your property taxes.
  • You'd pay taxes on the rent that you're paying, as it is now income.
  • You have to do the accounting for the REIT.
  • The REIT needs to be audited by a CPA.
  • The brand new REIT has no income history, so it can't get a mortgage. You have to pay for the house up front.

In return, you get the benefits of the REIT tax accounting. Since we don't hear about people doing this, I'm assuming that these advantages are smaller than the advantages given to individual home owners. REIT financing is getting a bit off-topic though.

Individual home ownership is heavily subsidized. By doing this, you would forgo all those subsidies. Commercial real estate also has some useful tax deductions, but not necessarily superior.

TL;DR Individual home owners get better tax treatment than investment vehicles.

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    Can you even do an individual REIT? Everything I can find suggests that they require many (>100) investors. – D Stanley Mar 2 '17 at 18:46
  • Possibly not, but that just gets us to some scheme where you get together with a thousand like minded people to do the same thing. Or where we substitute some other structure for "REIT". E.g. an LLC or corporation. – Brythan Mar 2 '17 at 18:52
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This would work just fine. I'm not sure what you expect to gain, but you would certainly lose your $250,000 capital gains tax exemption on your primary residence when you finally sell it.

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