Put Your Rental Home into a Corporation or LLC
Putting Rental Home Into a LLC or S-Corp is Sound Medicaid Planning
Aaron E. Futterman, Esq.
To qualify for Medicaid in New York, the Medicaid Regulations (“Regulations”) provide that all income and resources actually or potentially available to a Medicaid applicant or recipient must be evaluated, but only such income and/or resources as are found to be available may be considered in determining eligibility for Medicaid. A Medicaid applicant or recipient whose available non-exempt resources exceed the resource standard ($15,150.00 in 2018) will be ineligible for Medicaid coverage until he or she incurs medical expenses equal to or greater than the excess resources.
The Regulations define “resources” to include any liquid or easily liquidated resources in the control of an applicant or recipient, or anyone acting on his or behalf, such as a conservator, representative, or committee. Resources are further defined in the Regulations to mean property of all kinds, including real property and personal property. It includes both tangible and intangible property.
A Medicaid applicant’s/recipient’s available resources include:
(1) all resources in the control of the Medicaid applicant/recipient (“A/R”). It also includes any resources in the control of anyone acting on the Medicaid applicant’s/recipient’s behalf such as a guardian, conservator, representative, or committee;
(2) certain resources transferred for less than fair market value;
(3) all or part of the equity value of certain income-producing property; and
(4) certain resources of legally responsible relatives
Nevertheless, certain income-producing property is not considered an available resource for purposes of determining Medicaid eligibility. Income-producing property includes but is not limited to real property, buildings, liquid business resources, motor vehicles, machinery, livestock, government permits, inventories, tools, and equipment which are used in a trade or business or which produce rents or land-use fees.
Since May 1, 1990, the equity value of income-producing property used in a trade or business is not considered an available resource. However, the equity value of income-producing property not used in a trade or business is considered an available resource if the property: consists of real property or other non-liquid property which generates rental income, land-use fees, or other income; and produces an annual net return of less than six percent of its equity value. If such property produces an annual net return of six percent or more, the amount of equity value of the property above $12,000, if any, is considered an available resource; and
Medicaid employees are advised (through the Medicaid Reference Guide) that indications that a Medicaid applicant has an equity interest in a business or trade include, but are not limited to:
(1) the A/R files a business tax return with the appropriate IRS Schedule (F for farms, E for non- business, C for a sole proprietorship, 1065 for partnership or 1120 for corporations);
(2) a certified statement from an accountant;
(3) business expenses or receipts for the last 12 months;
(4) the trade or business has separately identifiable assets;
(5) the trade or business has a name;
(6) the trade or business has consistently produced income;
(7) the trade or business has been in continuous operation;
(8) the A/R has no other occupation;
(9) the A/R presents him/herself as operating a trade or business; or
(10) the A/R signs a statement detailing the trade or business, including its assets, number of years in operation and the identity of any co-owners.
The following example illustrates why it may be beneficial for Medicaid planning purposes to incorporate a rental business.
FACTS: On July 31, 2017, an application for Medical Assistance (“Medicaid”) was made on behalf of Sally Smith (“Sally”), a widow of Smithtown, NY, who had been admitted to a Nursing Home in St. James, NY on March 15, 2017. Sally requested coverage as of April 1, 2017. Sally’s assets on her Medicaid application included her former homestead in Smithtown, NY and a rental property in Commack, NY that has no outstanding mortgage. Sally receives $700.00 in rent each month for the property in Commack, NY. Medicaid denied Sally’s application and reasoned that she had excess resources based upon the value of the rental home exceeding the permitted amount of $14,850.00 (in 2017, note that the limit is $15,150.00 in 2018). Sally appealed this decision by requesting a Fair Hearing.
SALLY’S ARGUMENT: The rental property should not have been counted as a resource because it was income producing property used in a trade or business hence if the property was not counted as an asset she would be below the asset threshold of $14,850.00 in 2017.
MEDICAID’S ARGUMENT: The rental property is an asset (i.e., resource) and is not exempt under the Medicaid Regulations because it was not used in a “trade or business”.
DECISION: For Medicaid and Sally loses.
REASONING: The Administrative Law Judge first stated that the equity value of income-producing property is only exempt as an available resource for Medicaid purposes if it is currently being used in a trade or business. The Judge next stated that the equity value of income-producing property that is not being used in a trade or business is an available resource for Medicaid subject to a $12,000.00 disregard. Trade or business property was then defined to include “the necessary capital and operating assets of the business” such as real property. “Nonbusiness property” was defined to include “land which produces rent”. The judge concluded that if real property is producing income as part of a business it is exempt and in the alternative, real property that is not part of a business would be countable. Finally, the judge stated that the tax return for the year prior to application is used to determine whether the real property is used as part of a business or not.
The judge decided that the evidence supported Medicaid’s position that Sally’s income producing real property was not part of a business. The judge noted that the most persuasive evidence as to whether Sally was is in the business of renting properties was her most recent business tax return, which in her case was her individual return. In her most recent tax return as well as the previous four returns, Sally left the applicable lines for reporting “Business income or loss” blank on her Federal and State returns. Rather, she used Schedule E to report her rental income. Her choice to declare her rental income under Schedule E was noted to be inherently inconsistent with her claim that she in the business of renting properties. Under this type of reporting the rental income is considered a “passive activity” as opposed to a “trade or business activity”. Trade or business activities are generally reported on Schedule C. No evidence was introduced to suggest that Sally was a real estate professional, further distinguishing the rental income she received from the conduct of a trade or business activity.
Furthermore, Sally had not registered a “Doing Business As” (DBA) for her rental activities, or make any other designation to distinguish her alleged business activity from nonbusiness activity, including but not limited to maintaining a separate bank account for the business. While Sally pointed to a bank account titled to her individually that she alleged was used exclusively for her rental activities, a careful review of that account showed that her social security payments were deposited into this account. The comingling of her personal funds in the account refuted any claim that it was used exclusively for business purposes. Finally, Sally presented a statement from her accountant, which indicated that the rental property “was used for business purposes”. However, this was insufficient to on its own to support a finding that the Appellant was “operating a trade or business” for Medicaid purposes, particularly in light of the otherwise inconsistent references to the rental activity being a passive nonbusiness activity for tax purposes.
LESSON: Families or individuals that own real property for rental income purposes should strongly consider incorporating or creating a limited liability company and re-titling the property into the corporation or company. Thereafter, reporting the income as trade or business activity could make the difference if, in the future, Medicaid is sought. The property should be ignored as an asset if the business formalities are followed. And even if there is never a need for Medicaid there will be limited liability protections afforded by using either entity (corporation or LLC) as the choice of business operations.
See Fair Hearing # 7661455R (Erie, Dated Feb. 6, 2018).
Futterman & Lanza, LLP has offices in Smithtown, NY, Valley Stream, NY (by appointment only), Southampton, NY (by appointment only) and Babylon, NY (by appointment only).
Futterman & Lanza, LLP has clients throughout Suffolk, Nassau, Queens, Brooklyn, Bronx, Richmond, New York, Westchester, and Rockland Counties.
Futterman & Lanza, LLP concentrates its practice to Elder Law, Medicaid Planning, Medicaid Applications, Estate Planning, Probate, Estate Taxes, and Estate Administration.
Aaron E. Futterman, CPA, Esq. is a partner in the law firm of Futterman & Lanza, LLP with offices in Smithtown, NY and Valley Stream, NY and clients throughout Suffolk, Nassau, Queens, Brooklyn, Bronx, Richmond, New York, Westchester and Rockland Counties. He concentrates his practice on Elder Law, Medicaid Planning, Medicaid Applications, Estate Planning, Probate, Estate Taxes, and Estate Administration.