Best way to use my HELOC when just getting started?

Question

I’m interested in buying a 50k-100k property with my HELOC. But I’m not quite sure how things work best with taxes this way.

I plan on buying the property(s) in an LLC. Then have that in a holding company.

The idea is to put all of the rent back in to pay down the HELOC. Then withdraw through the HELOC whenever cash is needed (such as taxes).

From a tax standpoint will this work well writing off interest and anything else?

Any tax advice or suggestions would be appreciated.

Thank you

Eamonn McElroy · Answer

@Melanie Pendrey

Is the LLC a SMLLC disregarded for federal income tax purposes?

If so a promissory note between the SMLLC and you will not be respected for tax purposes. No change.

Great convo to have with your tax pro to structure this the optimum way for income tax purposes.

Melanie Pendrey · Answer

Thank you for the feedback.

I forgot to mention I had read that we could do a promissory note on the LLC for tax purposes so we can write off the HELOC interest. Would solve the tax problem?

Eamonn McElroy · Answer

@Melanie Pendrey

This will complicate your tax situation...

Mixing HELOC proceeds for whatever you need whenever you need means you need to trace and track proceeds to determine interest deductibility. Interest on proceeds used to buy a rental is generally deductible, interest on proceeds used to pay your individual taxes is personal in nature and non-deductible.

There are specific rules on what order proceed "lots" are paid back per the interest tracing rules when mixed use is involved.

I recommend speaking with your tax pro and keeping them in the loop regarding this plan.

Tom Makinen · Answer

You shouldn't really do that. You have to set up a loan/contribution between yourself and the LLC in order to keep them separate. You basically deed the house to the LLC as a member contribution if you have a discarded entity. The LLC will do its thing, collect rent and issue distribution to you. When you get it, you can do whatever you want. That will in turn draw down the contribution.

Better yet, record the house as a loan, you have to draw interest and get the money out of LLC that way. You don't just use the LLC's bank account to pay your HELOC.

Brandon Beaudoin · Answer

@Melanie Pendrey I'm interested in the feedback to your question here.

Best way to use my HELOC when just getting started?

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