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LLC mortgage and distribution question

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    LLC mortgage and distribution question

    This seems to be quite a complicated question and also very mind-challenging. I hope the bright minds in this forum can share your opinion on it.

    Client solely owns a LLC. (By the way, I have just simplified the scenario by making a one-partner and sole-owner situation. The real situation does have more than one partner. So the disregard entity issue does not apply there).

    In 2016, he used a real property of the LLC to borrow a mortgage loan for his personal use. The total amount of the mortgage loan proceeds had been reported as distribution to him in the 2016 Form K-1.

    In 2017, the LLC paid mortgage payment of $1,000 each month for the mortgage loan. So the total 2017 mortgage payment paid to the lender is $12,000. The 2017 total mortgage interest is $9,000.

    I understand the $9,000 mortgage interest is to be reported on his Form K-1, line 13 with code 'W'.

    My question is: Should the $12,000 mortgage payments made by the LLC to the lender be reported as distribution to the client in 2017?

    I had a short discussion with a colleague about this question, she thinks only the interest portion, $9,000, should be reported as distribution to him in 2017. I thought she was incorrect initially. But then after pondering on it, now I think she might be right.

    Let's say the mortgage loan original principal was $100,000. This $100,000 had been reported in 2016 as distribution to the client.

    Let's also say the LLC makes a yearly total mortgage payment of $12,000 for 10 years to pay off the mortgage loan. Therefore, the total lifetime mortgage payment is $120,000. Of this total amount, $100,000 would be repayment for the principal of the loan and the remaining $20,000 must be the mortgage interest. Since the client had already reported a distribution of $100,000 loan principal in 2016 when the loan was borrowed, he still need to report the $20,000 mortgage interest as distribution during the 10 years loan period. Therefore, the interest portion amount of $9,000 in 2017 is to be reported as distribution in the 2017 Form K-1.

    Does anyone agree or disagree?
    Last edited by AccTaxMan; 02-27-2018, 01:43 PM.
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