MORTGAGE INTEREST INCOME & EXPENSES

[KATHERINE]

Hi dear friend here, 

Another question again.   A client lend money out as a mortgage through the LLC jointly owned with wife.  So, they got interest income.   Where should I deduct the annual state filing fee and accounting fees?  Should I report on first page of 1065 without any ordinary income (interest income is seperately listed income on Sch K already)?

Thank you for your valuable time on this.

 

Kate

 

[Lee B]

Are they in the business of lending money? If not, I would treat this as a joint venture and report this interest income on Schedule B without the filing of a 1065.

If they are not in the business of lending money which is an investment activity, then the filing fees and accounting fees are not deductible.

[KATHERINE]

Hi dear CBSLEE, 

They are not in business of lending money, both spouse are doctors.  This mortgage they lend out is the only lending they have.  Instead of lend it through their personal, they created an LLC for it, so the LLC reports the interest income on schdule K and flow to K1 box 5.   

I dont think they want to report on their personal Schedule B.

What I think is if it is a rental, which is passive, I will report the expenses on 8825, so it will be net out, but there is no form for this type of activity.  

So, it is not deductible, because it is not an ordinary business; it is investment, and investment expenses at personal level is not deductible, right?

 

Thank you!

 

Kate

 

[KATHERINE]

OK.  I decided to put K1 20B, hope that is correct.  thank you!

[Lee B]

If you are going to file the 1065, then the interest income goes on Schedule K and the fees are an M-1 adjustment for nondeductible expenses.

[KATHERINE]

Thank you, sir. I agree with you.  The interest is all passive income because they are not in a active lending business.  It is more like help a seller finance or help a friend out.    It is investment income and investment expenses is not deductible in personal so should reflect on K1 so it will get same treatment after import to personal level.  The old accountant put on first page of 1065 which I will not follow.   I will do the full interest in box 5 of k1 as interest income, and the accounting fee & NYS filing fee in box 20 code B, as investment expenses, because NY is still allow old 2% misc deduction.   Thank you!!    --Kate

[Lee B]

Just remember, if this generates a state tax deduction then the partner's federal outside basis and state outside basis will be different.

[KATHERINE]

Hi CBSLEE, hope the software can help with.  ATX can import K1,  I usually dont keep track basis in excel, that will kill me.  Do you keep track basis outside software?  Any better way to do it?  Thank you!  Kate