Shareholder basis in S Corp-Real Estate Rental

[sami]

I don't do too many of S-corp returns and that's why I need help, please. I have two shareholders who bought a rental real estate (50%each) under an LLC name. They both contributed $600,000 each and took a loan out under the LLC name for $1.5 million. The LLC is collecting rent and paying off the loan and shareholders are taking distribution from the LLC on the remaining amount that is left in the account. My question is on the shareholder adjusted basis worksheet, where will the principal amount of loan that was paid during the year will appear? Does the principal payments go as Add'l paid in capital? All that I did is put the capital contribution was $600,000 and the debt basis is the loan amount, I know I am missing something because as they payoff more loans, their basis is going down, which does not make sense.

[TaxGuyBill]

and the debt basis is the loan amount

This is definately NOT my area of expertise, but I'll get things started.

First, you said S-corporation. Has the LLC made the election to be taxed as a S-corporation? That is somewhat unusual for holding rental real estate.

If I remember correctly, for an S-corporation, you only get Basis for a corporate loan if the shareholder actually pays the loan. For a non-corporate LLC, it depends on if the member is liable for the loan or not.

https://www.thetaxadviser.com/issues/2018/jun/allocating-llc-recourse-debts.html

Again, this is not my area of expertise, but if you can give us more information about that, somebody else may be able to help you further.

[sami]

Yes, the S-corp election was made as of 1/1/2018. The loan is under the entity's name and the closing statement has the entity name too. The collateral for this loan is the real estate. This is an LLC for state purposes but being taxes as 1120S.

[TaxGuyBill]

So if the mortgage company forecloses, there is no liability on the members/shareholders, right? Then there is no Basis for the loan.

[kathyc2]

I know I am missing something because as they payoff more loans, their basis is going down, which does not make sense.

In a nutshell basis will be the 600K plus pass through income, less pass through losses, less distributions taken. So, if distributions are more than income the basis will do down. Like Bill said, the bank loan will not affect basis.