HELOC investment within personally owned LLC

4 Replies

I have seen a few threads on narrow topics related to the use of HELOC for funding investments in an LLC but I wanted to ask zoom out a little seek some general feedback on what is likely a common situation. As an investor with access to home equity and cash interested in flipping or brrrr where the initial investment is deployed for a short period, what concerns would folks raise from a tax, legal or finance perspective on the following strategies? I'm thinking specifically about maintaining LLC liability protections, tax implications and overall financial performance of the arrangement (some folks have mentioned making a spread on the interest from HELOC rate and the interest charged to the business - case 1).

1) Use HELOC to fund purchase and rehab, use LLC cash to pay interest on the HELOC

a) In this scenario would a formal loan agreement be required between me and my LLC or just pay the interest and call it a day

b) If I pay the interest on the HELOC personally does that create an issue

c) Do I need to first transfer the money into my LLC account before making the purchase

2) Use LLC cash only for all of the above before refinancing or selling

3) Some combination or something better?

Any suggestions are greatly appreciated.  Also if this has already been squarely addressed that I wasn't savvy enough to find with the search tools please link.  Thanks all.

@Michael Feaga

If you really want the desired protection from the LLC, You need to treat LLC as a separate entity.

For HELCO loan, I would take the cash out and contribute the cash LLC's book as a current year contribution. Then, LLC can use it for whatever it requires to. That is the cleanest and easy way to deal with this.

You do not an agreement between LLC and you, just pay the interest out of LLC account because there are an interest tracing rules. if you ever need to prove, you can trace interest expense to your investment and properly get the deduction. Make sure you keep a trail log of how the money is being transferred to investment /LLC for a business purpose.

@Michael Feaga

there are no risks. It has to be done. 

You can actually book the heloc liability in the company ( LLC's ) book.

Debit.  Contribution  

Credit.  Helco notes payable

If you are not familiar with bookkeeping, get help. 

Good luck 

Originally posted by @Michael Feaga :

1) Use HELOC to fund purchase and rehab, use LLC cash to pay interest on the HELOC

a) In this scenario would a formal loan agreement be required between me and my LLC or just pay the interest and call it a day

b) If I pay the interest on the HELOC personally does that create an issue

c) Do I need to first transfer the money into my LLC account before making the purchase

1 - yes

1a - if you're filing a separate tax return for the LLC (for example, if you treat it as an S-corporation) - then yes. In most cases, there is no separate tax return, and the LLC is reported as part of your personal tax return. In this case, a formal agreement is not required, but it is still helpful, especially considering how simple it is to draft and notarize.

1b - yes, it would create both a tax issue and potentially a legal protection issue. Do not do it.

1c - yes