Interest Expense Allocation


I’m investing in properties with some other people through an LLC. As you probably know its very difficult to obtain financing in an LLC.

Suppose I purchase properties in my name and the quit claim it to the LLC (lets forget about the DOSC issue for purposes of this post), then the LLC has title and receives rental income, but I PERSONALLY (not the LLC) receive the 1098 and would be entitled to the mortgage interest deduction per IRS rules as the person legally responsible for the debt. Is there anyway around this? Perhaps executing an agreement between myself and the LLC? I want the other members to be able to take the deductions for their share of interest expense.

I ran across this:

Which makes me believe there are lenders out there, but I also spoke to someone who says that LLC lending will bear high unattractive rates and not to bother. (I am totally willing to guarantee the loan personally that is in the name of the LLC).

Seems like industry practice is to purchase it in the name of the individual and then quit-claim it to the LLC. I’d be willing to do it if it were a single member LLC, because the interest expense would end up in the same place anyway, but because there are partners I’d have to do the tax return incorrect. As a CPA with an MS in Taxation, I’m not willing to blatantly do the tax return wrong. Does anyone else have any ideas, or know where I can get (attractive) financing?

The deal is small, but its really just an experiment (I could buy the house myself, but I’m looking to start higher profile real estate investment funds and want to work out the nuances here) – if it works, I’ll look to do much bigger deals with higher profile investors.

Thanks everyone for all of your help!

What will the other members contribute to the LLC to match your contribution? I am assuming that you have equity in this property.

Have the LLC make your mortgage payments. Now your LLC has the mortgage interest expense on its books as business interest, and will pass that through to all the members in whatever allocation your operating agreement defined. Your personal tax return would reflect only your share of the interest expense.

Just because you get a 1098 for the mortgage interest does not mean that you have to report it on your 1040.