LLC Loans

[S T]

My Brain is Mush!

Husband and Wife create a LLC for real estate rental property.

Their question is rather than a bank financing the mortgage, can they as individuals loan the money to the LLC and then charge the LLC interest as if the husband and wife were holding the mortgage note? Of course they as individuals would have to claim the interest on Schedule B.

I am not clear on how or if this could work. I am thinking that possibly the LLC would file a form 1065.

The loss that would be produced would be passive and subject to the income limitations, so would be carried forward probably to be used at disposition.

Sandy

[Gretel]

Mortgage

Hi Sandy. I am wondering why they would want to do this? They might have to claim the interest on Sch.B right away but not able to take the deduction, as you said.

I believe they can do this if they are filing form 1065. You can not do this type of transaction on Sch.E or C. And of course the term of the mortgage need to be arm length.
Again, why would they want to go through all this?

[S T]

Clients Questions

Hi Gabriele,

Thanks for posting. This really was an off the wall post, and I do not really know the answer. The taxpayer is high income, so they are just searching for tax relief, not tax avoidance!

Yes they will file the LLC as form 1065, and you are right as I already presumed, they would have to claim the income of interest on the mortgage note as Sched B income. So I guess the only other obvious would be to deduct the passive loss carryovers when and if they ever dispose of the rental property.

But I was concerned about arms length transactions!. Can they as individuals create the mortgage for the LLC. I guess it would have to be recorded as such.

Taxpayer asked the question, I was trying to develop an answer that was within the parameters of the tax code. Obviously I will have to add a disclaimer to this email response.

Thanks for your input and advice along with anyone else that would like to shed some light on this.

Sandy

[JG EA]

Llc

I have husband/wife LLC's taxed as individuals in the case of real estate only and husband/wife LLC's taxed as partnerships in the case of businesses. (Community property).

Anyway, for the LLC to individual the important question would be what is allowed to keep the liability protection. Perhaps the attorney who set it up could answer that question. But, if the liability protection was there then as individuals couldn't the loan could be in their names?

If 1065 then wouldn't it just follow the rules of a normal partnership as far as loans are concerned?