Hello,
If I use a HELOC check from my primary residance for the down payment to purchase an investment property, is the interest on that deductable? The HELOC account is in my personal name, and the property and first mortgage will be in the name of my LLC; not sure if that matters, just thought I’d add that.
Thanks.
To answer your question, yes, it’s deductible.
However, this IS comingling and should be avoided.
Better you should write the HELOC check to the LLC as a LOAN. have the LLC sign a promissory note in your favor and make payments to you and then you make payments on the HELOC. DO NOT make payments directly from the company to personal creditors - comingling.
Interest from the company to you is deductible to the company.
Interest income to you from the company is interest income, but put it on a Sch C and offset it with the interest expense (you are in the business of loaning money to LLCs) on the HELOC.
Mark,
Newby101 still gets to take a home mortgage interest deduction on Schedule A for the interest paid on the first $100K of the HELOC loan, right?
when it more than 100k, my tax professional (an EA) will take it as investment interest (sch A) for non-rentals and onto SchE for moneies used for purchase, repair, etc of a particular rental property.
So if I had an LLC holding my property, and used HELOC to buy it, but didn’t do what Mark suggested, then I could still claim interest on Schedule A, but I couldn’t use that interest as a deduction against the investment property LLC tax returns, right? It sounds to me that I must do what Mark said, so that on the 8825 form for my LLC, I can deduct the HELOC interest from the gross rents. Also, is it form 8825 that I would file for my property in the LLC?
If you had used your HELOC to purchase your rental property in your own name, then you would deduct the interest paid on the loan against your rental income on Schedule E, not Schedule A. Loan interest tracks to the asset you purchased and the tax treatment on the loan interest follows the tax treatment applicable to the asset. Since you are a sole proprietor in this scenario, you don’t have any comingling issues to worry about.
The exception to the interest tracking rule is the HELOC loan secured by your primary residence. If you use the funds for a non-investment purpose, such as buying a new car, going on vacation, or, paying off credit cards where the interest is not deductible anywhere else on your tax return, the IRS allows a home mortgage interest deduction on Schedule A for the first $100K borrowed from the HELOC.
Comingling funds is the fly in the ointment that will allow the court to pierce the corporate veil if your LLC is sued. If you want to preserve the asset protection feature of your LLC, then you need to avoid comingling funds. Mark’s strategy of an arm’s length loan does just that.
Following Mark’s strategy, you have two loans. The first is your HELOC which gave you the funds to originate the second loan – the loan your (sole proprietor) “business development company” makes to your LLC.
After you have the funds from your HELOC, you make an owner contribution of capital to your business development company which uses that money to make a loan to your LLC. The LLC deducts the interest it pays on the loan, and you report the interest income your business development company receives from the LLC on Schedule C. So far this is a wash – the interest paid by the LLC is reported on Schedule E and offsets the interest income received by the business development company and reported on Schedule C.
You still have the HELOC loan you are paying interest on. Since the HELOC loan is secured by your primary residence, and the interest is not deducted anywhere else on your tax return, you can take a home mortgage interest deduction on Schedule A for the interest paid on the first $100K borrowed from your HELOC.
Just how I see it.
Thanks Dave. But I think I’m more confused now. Do I need to set up a second LLC, a business development LLC? As I understood what Mark said, I sign a promissory note with my LLC for the primary residance HELOC money. This is a loan from me to my LLC, in which my LLC pays interest to me, and I pay interest to the HELOC bank. So then, when I do the taxes on my LLC, I can deduct the promissory note interest from my Income. On my personal income taxes, it would be a wash; I collected interest from my LLC, and paid the same amount of interest to my bank. I think this is what you just said, but without a business dev company in the middle. Do I really need that for the most protection? Thanks a bunch guys. I have less than 30 days to figure this out. I have HELOC funds, and an LLC to purchase the property, but no other LLCs. Thanks!
What Mark told you is that the LLC takes a business interest deduction for the interest the LLC pays you personally. That interest you receive from the LLC is taxable income to you which gets reported on Schedule C. The deduction taken by the LLC is offset by the income you report on Schedule C, so at this point you are tax neutral. Mark suggested using a Schedule C activity to make the loan to your LLC to preserve the asset protection afforded by your LLC. His concern is that without a formal, arms length transaction between you and the LLC, you will be comingling funds which could nullify the LLCs asset protection and make you personally liable if the LLC is sued.
What I am adding to Mark’s comments is you still have to turn around and pay the bank interest on the HELOC loan. This interest payment is deducted on Schedule A as a home mortgage interest deduction.
Schedule C is used by sole proprietor’s – those engaged in a business activity without using a business entity to report the income and expenses incurred in the normal course of their trade. There is no second LLC needed here. Business development companies lend money to established businesses which might not otherwise obtain funding from traditional lenders. Your LLC may fit that profile, so I suggested you label your sole proprietor (Schedule C) activity a business development company. You don’t have to, I was just making a suggestion.
Thanks Dave; I think I understand now.
As Dave points out: “technically” HELOC deduction is limited, but…
I would be a little more agressive and take the full interest deduction on the Sch C.
Sch C income now becomes zero ($100 interest income from the LLC and $100 interest exp to the bank).
LLC deducts $100 of interest exp on whatever tax form it files on.
The interest would be fully deductible if from any other source. I apply the same logic and ignore the HELOC limits (as long as 100% of the HELOC was used for business purposes).