I’m new to the board. I’ve read through as much of the forum as possible and couldn’t find a specific answer this the following question. Greatly appreciate any help you can provide.
Question: I have built an extensive financial model to help research residential investment properties. My objective is to buy, transfer to a LLC, and rent out for at least 5 years.
My specific question relates to the tax treatment of the mortgage payment. Assume the LLC operates at a net loss from a tax perspective. If a property is part of a LLC, can I treat the entire mortgage payment (principle + interest) as a business expense, which in turn passes through as a tax shield to my personal income from the LLC? Or, is only the interest portion of the mortgage allowed to be used as a tax deduction – as is allowed for personal property?
Also, if the property I buy is a condo, can the LLC depreciate the entire purchase price over 27.5 years since there is no land being included in the purchase?
I will take a stab at this. Whether you have an LLC or not, the principal portion of your loan payment is never a deductible expense. For most, the mortgage payment is PITI. The deductible interest you paid will be reported to you at the end of the year on a Form 1098.
The acutal amount you pay for property taxes and insurance each month is paid into an escrow account. Only the amount withdrawn from the escrow account to pay the taxes and insurance can be expensed on your schedule E. These amounts may also be reported to you with your Form 1098.
So, no, the full amount of your mortgage payment can not be deducted.
As a general rule, an LLC is a pass-through entity. It does not pay any taxes in its own right, but instead, all the LLC’s rental income and expenses are passed through to your personal 1040. If your LLC is a single member entity, then you would report your rental activity on Schedule E (1040) as if the LLC did not exist.
Also, if the property I buy is a condo, can the LLC depreciate the entire purchase price over 27.5 years since there is no land being included in the purchase?
Even condos have land. The land is called a common element and each member of the condominium association has a fractional ownership. If you have a condo, look at your most recent property tax assessment to see how much value the county tax assessor has assigned to your interest in the land and how much value has been assigned to your condominium.
Calculate the percentage of the property’s total tax assessed value that applies to the improvement (your unit). Multiply that percentage by your purchase price to determine your initial depreciation basis.