Using personal HELOC proceeds for rental purchase

[Finance Dave]

Wife and I have an LLC. Own one rental in the LLC, already paid for. Looking to buy second property. Considering financing options.

There are a myriad of options, but one in particular I'm scoping in on, but need to verify something.

If I take out a HELOC against my primary residence, and use those funds to purchase property within the LLC, can I deduct the interest paid on the loan as an LLC expense on schedule E?

It seems that I'd have to take another step and somehow report interest income on my personal return, or something similar.

I also want to avoid commingling of funds, so that's what's leading me to think about essentially loaning the money to the LLC.

Any insights? Please post a link if you know of any good articles on this.

Thanks!

 

[HpRyder]

I'd loan the money to the LLC under the same terms & conditions as the HELOC and have the LLC make the purchase. Then the LLC takes the interest payment deduction, you take the interest payment as income and as the HELOC payment as a deduction. This assumes you have not exceeded the $100K additional interest limit on your personal residence.
But be aware that this probably constitutes a material participation event in LLC activities and may degrade the legal isolation you think the LLC provides you.

 

[Finance Dave]

Thanks for the input!

I have two questions:
1) I note in this link that the material participation feature does not apply in rentals...am I reading it wrong?
Passive Activity Loss ATG - Chapter 4, Material Participation

2) Regardles of above, what's the impact on taxation if any of the active vs. passive aspect?

Dave

I'd loan the money to the LLC under the same terms & conditions as the HELOC and have the LLC make the purchase. Then the LLC takes the interest payment deduction, you take the interest payment as income and as the HELOC payment as a deduction. This assumes you have not exceeded the $100K additional interest limit on your personal residence.
But be aware that this probably constitutes a material participation event in LLC activities and may degrade the legal isolation you think the LLC provides you.

 

[HpRyder]

Yes you are reading it wrong. You are not participating in the rental activity, the LLC is. A feature of LLCs is that, if properly used, provide a liability shield for all assets held outside the LLC. Only the LLC assets are at risk. If however you participate in the LLC activities, then you could be liable for any LLC activity. Thus your activities on behalf of the LLC put you & your assets at risk. As for the flow thru from the LLC for rental income & expenses, I'll let a knowledgeable CPA answer. In my opinion the taxpayer LLC is engaged in the rental activity, not (I hope) you. So the material participation determination is with respect to the LLC, not you. In all likely hood you can arrange it so the depreciation & net positive income, if any, is passed on to you, but probably not any net losses ( ie. expenses exceeding income ).

Since I don't do LLCs, you should get a CPAs input on how to arrange this.

 

[Finance Dave]

Thanks. I do have an appointment with a highly qualified CPA and "business advisory" firm on the 23rd. So far I have not comingled, and have kept things very separate...we have separate credit card with business name, separate bank account, property deed is in business name, and so on. I want to do this right...thus my questions and visit to the CPA.

Regards,

Dave

Yes you are reading it wrong. You are not participating in the rental activity, the LLC is. A feature of LLCs is that, if properly used, provide a liability shield for all assets held outside the LLC. Only the LLC assets are at risk. If however you participate in the LLC activities, then you could be liable for any LLC activity. Thus your activities on behalf of the LLC put you & your assets at risk. As for the flow thru from the LLC for rental income & expenses, I'll let a knowledgeable CPA answer. In my opinion the taxpayer LLC is engaged in the rental activity, not (I hope) you. So the material participation determination is with respect to the LLC, not you. In all likely hood you can arrange it so the depreciation & net positive income, if any, is passed on to you, but probably not any net losses ( ie. expenses exceeding income ).

Since I don't do LLCs, you should get a CPAs input on how to arrange this.

 

[clifp]

I got a HELCO for the specific purpose of investing in Rental properties. It was my intention to deduct the interest on Schedule E although I haven't checked with anybody to see how to do this. At this point it is somewhat of moot point, since my real estate transactions are on hold until I get my current Vegas property rented. I had thought about setting up an LLC.
I'd be very interested in the feedback you get from your CPA. I do have documentation that my Helco was being used for funding the purchase of rental properties.

 

[Finance Dave]

I'm learning that no matter what one person has done, you really need to talk with your CPA because there are so many intricacies in the tax code. For example, I found out today that if you have a one-owner LLC, the tax preparation is different than if you have a two-owner LLC. One owner can be filed as sole proprietor, and go on Schedule E, but two-owner must go via a K-1 and be filed as a partnership. I'm no expert on this obviously, but I'll get smarter as I go through one full year of this (our first property was bought in March 2011, so no tax returns with this setup yet).

I got a HELCO for the specific purpose of investing in Rental properties. It was my intention to deduct the interest on Schedule E although I haven't checked with anybody to see how to do this. At this point it is somewhat of moot point, since my real estate transactions are on hold until I get my current Vegas property rented. I had thought about setting up an LLC.
I'd be very interested in the feedback you get from your CPA. I do have documentation that my Helco was being used for funding the purchase of rental properties.