Mortgage interest deduction for an entity

[Gretel]

I am just coming off the phone with a tax attorney. He says that the rules for deducting mortgage interest we have to follow on a 1040 for a personal residence do not apply to entities. Is that true?

[DexEA]

Not sure just what you're asking or just what the attorney is saying? Are you looking at the tracing rules or election not to treat mortgage interest as secured by the property?

[ChEAr$]

For an entity, e.g. corporation, it doesn't have a personal residence, so those rules certainly don't apply.
Maybe this is what he means?

[Gretel]

asleep

Thanks guys. I realized that I was asleep when the attorney said this. We talked about qualified mortgage interest for a 1065 LLC, where part of the funds was used to buy another partner out. He said those mortgage limitation rules don't apply to entities, which makes perfect sense. What does apply is interest tracing rules and they are not limited to individuals, correct? Wouldn't make any sense since all entities would take out loans and have the entity deduct the interest.

To his defense I have to add that we talked about complicated issues around this and neither he nor I was thinking it through on this point.

The LLC needs to make a loan to the member using the same terms as the original loan has, member needs to make payments to LLC (then interest deduction and interest income is a wash). Member has a deduction on his schedule E pg. 2 for investing in the partnership interest, correct?

[ChEAr$]

Thanks guys. I realized that I was asleep when the attorney said this. We talked about qualified mortgage interest for a 1065 LLC, where part of the funds was used to buy another partner out. He said those mortgage limitation rules don't apply to entities, which makes perfect sense. What does apply is interest tracing rules and they are not limited to individuals, correct? Wouldn't make any sense since all entities would take out loans and have the entity deduct the interest.

To his defense I have to add that we talked about complicated issues around this and neither he nor I was thinking it through on this point.

The LLC needs to make a loan to the member using the same terms as the original loan has, member needs to make payments to LLC (then interest deduction and interest income is a wash). Member has a deduction on his schedule E pg. 2 for investing in the partnership interest, correct?

If the LLC borrowed the money and then redeemed the other partner's capital interest, what is the problem?

Looks like you're trying to complicate matters when you imply the remaining partner is the one who bought out his partner.

It's not both; one or the other, and I suspect the former.

[Gretel]

If the LLC borrowed the money and then redeemed the other partner's capital interest, what is the problem?

Looks like you're trying to complicate matters when you imply the remaining partner is the one who bought out his partner.

It's not both; one or the other, and I suspect the former.

I never said there are only two partners. This is still a partnership. If the partnership had ceased to exist I would not have any problems.