accounting for personal 401k loan for 25% down on mortgage

1 Reply

Hi fellow BP'ers!

We recently took a personal 401k loan and used part of it for a 25% down payment on a mortgage (assume $25k).  Additionally, we tacked on ~$6k in rehab costs to a personal credit card.

With regards to the accounting, the initial mortgage is a liability on the balance sheet with a monthly debt service expense.  At tax time, we can deduct the interest, not the full amount.  For P&L, I'm thinking I would show the full amount coming out of the profit.

I want to attempt to account for my personal money (401k loan + credit card debt) that I've lent to "the business" (currently still in my personal name, but we have intents on eventually transferring it to an LLC, once we get over the fears related to a quit claim deed) as a liability as well. I'm thinking I could setup a liability account "Payable to Owners" for $31k, for example. And then there would be a monthly expense of say $300-400 that would reduce that account, and go back into my hands to pay those bills.

Does what I'm trying to do sound sane?

Also, from an IRS perspective, is there anything I should attempt to do to allow me to not account for that "additional debt service" as part of the taxable income?

Thanks in advance for any advice!


@Joseph Hoot , the IRS will only consider your 401K loan to be income if you default on the repayment. If you post a payment outside the cure period even one time, the IRS may consider the entire loan to be a distribution and you become responsible for taxes and penalties. My advice is to bird-dog those payments!

Best of Luck with Your Real Estate Investing!

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