LLC mortgage interest

[JackieCPA]

I have a client who is a partner in an LLC and receives a K-1 showing rental income. (She is listed as general, active partner)

The client gets a 1098 for mortgage interest for the property being rented as she owns it personally and pays the mortgage personally. The LLC does not use the interest on the partnership return. 

Can we use this on her personal return as investment interest? Form 4952? She'd be not using it this year anyways as she does not have any passive income - but I know she can't use it as qualified mortgage interest on the A. 

Any thoughts? 

 

[Margaret CPA in OH]

Curious - how can client own rental property personally and pay the mortgage personally yet the rental income be reported on a partnership return?  If the partnership gets the income, why does the client own the property and pay the mortgage?  If the owns the property and pays the mortgage, why does the partnership receive the income? 

[Lee B]

56 minutes ago, JackieB said:

I have a client who is a partner in an LLC and receives a K-1 showing rental income. (She is listed as general, active partner)

The client gets a 1098 for mortgage interest for the property being rented as she owns it personally and pays the mortgage personally. The LLC does not use the interest on the partnership return. 

Can we use this on her personal return as investment interest? Form 4952? She'd be not using it this year anyways as she does not have any passive income - but I know she can't use it as qualified mortgage interest on the A. 

Any thoughts? 

 

Boy, what a mess!  Are you sure she owns the property personally?

[jklcpa]

My guess would be that it was originally purchased in her personal name and transferred to the LLC but the bank wouldn't change the name on the debt.  Haven't we all seen that before?

But why is she still paying it personally?

Yes, a total mess!

[JackieCPA]

Yes, It is a very odd situation. 

They swear that the tax preparer of the partnership return says they won't put it on the partnership return (They all pay the mortgage personally in proportion of percentage that they own the partnership). 

I'm going to maybe just have to get more information from them. 

[Terry D EA]

7 hours ago, jklcpa said:

My guess would be that it was originally purchased in her personal name and transferred to the LLC but the bank wouldn't change the name on the debt.  Haven't we all seen that before?

But why is she still paying it personally?

Yes, a total mess!

Ditto this. I'm just as confused as the rest. I have some clients who fit this very scenario Judy mentioned. But, the mortgage is paid from the rental proceeds and not personally by the partners. Therefore, deduct the interest. I'll wait to see where this goes.

[Abby Normal]

I've often heard that a partnership is just a collection of sole proprietors, so I don't think the IRS would have a problem with the mortgage not being in the LLC name, but I'd want the property to be in the LLC's name.

And I'd just record the mortgage payments on the LLC's books as a credit to partner capital and debits to interest expense and mortgage payable.

When the building was added to the books, it would have been a credit to partners capital so setting up the mortgage liability would a debit to partners capital.

[jklcpa]

I did exactly as Abby described when I last had an LLC with this issue. In my client's case, the LLC made the payments, not an individual partner.  The partners are also my clients, so in those years before the debt was paid off I attached a statement to the personal returns and the LLC returns each year with something like this:

• Interest expense in the amount of $___ reported on Form 1098 in the name of ___ and his SSN ____ is for a property that was legally transferred to ____LLC EIN# _____.  Bank continues to report that interest using the partner's SSN, however, that interest expense is now a debt of the partnership and is properly reported on the partnership return.

Edited April 27, 2021 by jklcpa

[JackieCPA]

The person who prepared the LLC's tax return said they will not do that as it is not in the LLC's name. 

So I guess I am back to my original, can I use this on her personal return? 

[Lee B]

Sorry, interest tracing rules apply, home mortgage interest and interest allocated to passive rental activities do not qualify as investment interest.

 

[Abby Normal]

4 hours ago, JackieB said:

The person who prepared the LLC's tax return said they will not do that as it is not in the LLC's name. 

So I guess I am back to my original, can I use this on her personal return? 

Tell them to make sure their partnership agreement allows partners to deduct unreimbursed partnership expenses (UPE) then add the total mortgage payment to her outside basis every year and deduct the interest portion as UPE.

[Lee B]

Abby, that definitely is outside the box thinking. Did you do this for a client? I don't think my imagination stretches quite that far.