LLC payback to HELOC

[Chris Ye]

We created a LLC to buy and hold rental properties. Because it is difficult for the new LLC to get bank loan, we applied a Home Equity Line of Credit (HELOC) under our own name. Our LLC has purchased a rental property that is paid with money from HELOC. The property is currently held under LLC's name and rent is deposited into LLC's bank account.

Questions:

1) Could we use rent from the rental property to make HELOC payment?

2) If yes, do these HELOC payments count as LLC operating expense?

[Michael Plaks]

@Chris Ye, @Mike Greenberg, @Jeff Kelly, @James Mc Ree

@Bryce Litwin, @Scott L. 

A lot of HELOC confusion, apparently. It's understandable, considering the awkward IRS (and Congress) language.

1. HELOC is no longer deductible as a personal (Sch A) itemized deduction, unless used for improving you own home.
2. However, the tax reform did not change the old rules that allowed deducting interest used for acquisition of business assets (Sch C), including rental properties (Sch E), regardless of the source of the money.
3. One catch though: the money must be traceable to the purchase. If you deposited the HELOC money into a special account and paid at closing from that account - no problem. If you deposited it into your regular personal account, mixing it with all your other money - possibly a problem.

As long as tracing is OK, you can deduct this interest, but not as "operating expense" for the LLC, but as "other interest" against the rental property on Sch E. (Do NOT use the "mortgage interest" line though!)

As far as logistics, you guys are over-complicating this issue, particularly since we're talking about a disregarded LLC. The LLC absolutely can - and should - directly pay the HELOC loan payments. Again, assuming it is traceable to the purchase of the rental.