I have purchased my first BRRRR property with private money provided by my mom. I am not sure which documents are needed in order for her to only be taxed on the interest she receives and not the principal payback. I may just be overthinking this. My lawyer and her CPA (who admittedly has no experience with this) both claim that a promissory note and a filed mortgage/deed of trust are needed for her to be properly taxed only on the interest she receives. Speaking with other experienced investors I have been told that only a promissory note is needed. If anyone could give personal experiences/insight it would be greatly appreciated. Being tax season, I haven't had any luck reaching out to other CPAs with how this should be done.

Other helpful info: Located in New Jersey. Property held in LLC. Principal and interest will all be paid back in a lump sum after cash out refi.

BONUS QUESTION: what kind of cash out refi rates have you gotten on LLC held properties?

@Michael Conte Why would a D/T be required for a tax question?

Technically all that is needed is for her to properly file her taxes...i.e. if she lends the money to you and then correctly claims the interest income and it isn't questioned then no paperwork was needed. Even if it was questioned it is pretty simple to show the original payment from her to you/LLC and your return of that money plus additional funds which would be the interest earned. Now from a practical perspective the promissory note gives you a piece of paper which defines the principal ergo the rest is interest...DOT just records her interest in the property so she has legal protection, but doesn't in any way impact taxation.

Originally posted by @Matt Devincenzo :

Technically all that is needed is for her to properly file her taxes...i.e. if she lends the money to you and then correctly claims the interest income and it isn't questioned then no paperwork was needed. Even if it was questioned it is pretty simple to show the original payment from her to you/LLC and your return of that money plus additional funds which would be the interest earned. Now from a practical perspective the promissory note gives you a piece of paper which defines the principal ergo the rest is interest...DOT just records her interest in the property so she has legal protection, but doesn't in any way impact taxation.

Thank you for the clarification. That is what my understanding of it was but like i said my lawyer got in my ear about needing the additional paperwork which he would be charging 750 + filing fees so i am assuming he was just trying to upsell me as this is my first property and dont have any experience.