How to treat - Rental or Investment Prop?

[JoshinNC]

Client took out a mortgage in personal name for building to be used to house wholly owned SMLLC. TP never signed lease between self (as owner of building) and LLC and no payments were made between the two for rent. Normally I would have had them buy the building in a separate LLC and rent it to the other LLC but I am finding out after the fact. Now I don't know where to deduct the mortgage interest, if anywhere, and whether to call this a rental or a Sch. D investment and capitalize the interest.

Any thoughts?

[BHoffman]

Client took out a mortgage in personal name for building to be used to house wholly owned SMLLC. TP never signed lease between self (as owner of building) and LLC and no payments were made between the two for rent. Normally I would have had them buy the building in a separate LLC and rent it to the other LLC but I am finding out after the fact. Now I don't know where to deduct the mortgage interest, if anywhere, and whether to call this a rental or a Sch. D investment and capitalize the interest.

Any thoughts?

I think the interest is capitalized during the construction of the building and added to its basis. After construction is complete, I think the interest is deducted on Sch E.

[joanmcq]

never mind.....

[JoshinNC]

So even though there's

I think the interest is capitalized during the construction of the building and added to its basis. After construction is complete, I think the interest is deducted on Sch E.

no rent it still goes on Sch. E? I guess that's where I'm getting confused. In my mind you technically don't have a rental, you have an investment held by the TP that the LLC is using free of charge.

[BHoffman]

How are you coding the costs? Who paid the mortgage? If the TP paid them and not the company, then perhaps you have some work to do in ascertaining how to put this situation into some compliance. If the company received the benefit of occupying the building, then perhaps there was some sort of barter arrangement between the TP and the Company? There is no free lunch. So, it's hard to say exactly what to do. It's difficult when clients come to us after not adhering to properly recording the transactions between shareholder and company. If the company paid the expenses directly, then perhaps you might consider whether those payments should be coded to drawings or to rental expense. Of course, the transaction would need to be recognized for tax purposes on the cash basis only. Please let us know what you decide.

[veritas]

I would say

you have an individual who owns a building which is used by a disregared entity unless the LLC has elected to be taxed as a corporation. I'm assuming the LLC is some type of business.

The result being you can't deduct rent to yourself.

I would deduct the building expenses on the Sch C.

[BHoffman]

I think Veritas is right about the self-rental, and forgot you pointed out that this TP is a SMLLC taxed as a sole proprietor. Sorry, I mostly prepare Corp tax returns when a business is involved.

[JoshinNC]

But the LLC doesn't own the building,

you have an individual who owns a building which is used by a disregared entity unless the LLC has elected to be taxed as a corporation. I'm assuming the LLC is some type of business.

The result being you can't deduct rent to yourself.

I would deduct the building expenses on the Sch C.

the TP does. This is so FUBAR!

[Jesse]

you have an individual who owns a building which is used by a disregared entity unless the LLC has elected to be taxed as a corporation. I'm assuming the LLC is some type of business.

The result being you can't deduct rent to yourself.

I would deduct the building expenses on the Sch C.

I agree with Veritas is correct, because it is a disregarded entity you can't rent to yourself. Even though the building is not in the name of the LLC maybe you could draw up a contract allowing the LLC to use the building and pay all expenses. If loans are involved could you take out in name of LLC w/ personal guarantees? I would still take the actual expenses on Schedule C.

the TP does. This is so FUBAR!

What does FUBAR mean?

[BHoffman]

Jesse - I believe FUBAR is an accounting term defined as "Fudged Up Beyond all Repair". Fudge is chocolate, and a well know staple of those in the accounting field. Because chocolate is so revered by us, we reserve the right to use it to define only the most gigantic client mistakes.

Josh - if the LLC is a disregarded entity by the IRS, not recognized as separate from the TP, then wouldn't that allow you to record the expenses on Sch C?

[Jesse]

Jesse - I believe FUBAR is an accounting term defined as "Fudged Up Beyond all Repair". Fudge is chocolate, and a well know staple of those in the accounting field. Because chocolate is so revered by us, we reserve the right to use it to define only the most gigantic client mistakes.

Thanks for the accounting lesson - I'm learnin' everyday!

Josh - if the LLC is a disregarded entity by the IRS, not recognized as separate from the TP, then wouldn't that allow you to record the expenses on Sch C?

I'd be interested in the answer to this question as well.

[JoshinNC]

FUBAR is a military acronym

I agree with Veritas is correct, because it is a disregarded entity you can't rent to yourself. Even though the building is not in the name of the LLC maybe you could draw up a contract allowing the LLC to use the building and pay all expenses. If loans are involved could you take out in name of LLC w/ personal guarantees? I would still take the actual expenses on Schedule C.



What does FUBAR mean?

The F is for a four letter word that would quickly get deleted, and the rest is Up Beyond All Recognition