How to pay personal mortgage from LLC account with co-mingling

Question

I have a personal mortgage for my rental but it’s owned by LLC so rents goes to business account. How do I pay personal mortgage using those rents?

I read the below approach online and wanted to see if this is correct and/or if there are other ways without co-mingling and keeping the entities separate.

“Write a check made payable to yourself, and then make the mortgage payment from that account.”

Michael Plaks · Answer

@Ryan Bird - Mike's suggestion is the correct approach. Details need an attorney's input to maintain asset protection, but basically you transfer the responsibility for the mortgage to your LLC and have the LLC pay it directly.

David M. · Answer

@Ryan Bird

That’s basically about right.  Whether you use a paper check or online transfer, you have to follow lines of ownership/privity.

Tenant pays the LLC because the lease should be between those two parties since the LLC holds Title.  As the Member of the LLC, you take a “owner’s draw” and transfer funds from the LLC bank account to your personal bank account.  Your are liable for the mortgage since it’s in your name so you make the monthly payments from your personal bank account

All that being said, I HEAR that having a Title held by your LLC and the mortgage in your personal name basically pierces your corporate veil. You’ve basically co-mingled funds because you have LLC debt in your name...  it’s not very c”clean.”  see what a professional says..

Good luck

Mike S. · Answer

@Ryan Bird

Can’t you adopt a resolution from your LLC stating that you have provided funding and given a personal guarantee for the loan and that the LLC will assume the mortgage.

This assumption, while probably not acceptable to the lender, will not be recorded and would justify your LLC paying directly the lender.

Mary M. · Answer

I think he needs to discuss with a cpa. Small businesses everywhere have used personal credit to fund their businesses.... its not rocket science, i promise :)

Mike S. · Answer

In my view the assumption of the mortgage is the most elegant way of structuring it. But again, as you and other have mentioned, that is a matter that need to be discussed with your CPA and possibly your asset protection attorney to make sure that you are not weakening your structure nor creating adverse tax consequences.

David M. · Answer

@Mike S.

Oh didn't realize you had offered these three options before.  Please don't take my mention of embezzlement literally.  Its just part of my "yardstick" to see if the entity is being operated independently.

First, I'm not sure if these are arms length transactions since you are the LLC are one in the same.  I know my attorney has cautioned me about that.

Second, I'm not sure how "informally" assuming the mortgage helps you.  I thought only two of the Gov't backed loans were the only loans that allowed to be assumed with the note holder's approval.

Third, I suppose creating note between yourself and the LLC to in effect "daisy chaining" the mortgage.  We've had some other discussions here in BP with lenders that makes me wonder if Dodd-Frank Act would get in the way.  Meanwhile, I'd be interested in how that would work tax-wise.  Now the person has to issue a 1099 for the interest paid on the Note by the LLC, and Federally the LLC is a disregarded entity.

Fourth, am I to assume your last option has the person directly paying the mortgage?  Title pretty much had to have been transferred as a member contribution.  In what way is the LLC tranferring compensation to the owner?  Cash?  I think I was going with that way.  Assumes there is enough rent roll and limited expenses to cover that distribution.  Otherwise, one would be sending funds in circles.

Again, as I've said this requires more professional consultation that I can provide.  I know at the State level LLC is a separate legal entity.  So for corporate veil purposes, at what point does making very convenient deals with "yourself" become too much?  For example, if you imagined this as a more so "true" arms-length transaction with two "strangers," how realistic are these terms?  If I was either party and the "other" party presented with these terms, I wouldn't take it --- what do I stand to gain?

Mike S. · Answer

I agree with you that you can't have the LLC pay directly the mortgage as is. That is why I offered three options:

The individual has transferred the property into the name of the LLC, at the same time the LLC assumed the loan on the property. The assumption, while notarized will not be recorded. The LLC can then directly pay the mortgage.

The individual has transferred the property to the LLC and a note was issued under the same term as the initial mortgage. The LLC then pay the loan back to the individual and the individual continue to pay the mortgage directly. However, then the individual will have to recognize the interest received and will probably be able to deduct the interest paid.

The last option is to enter the value of the property as member capital contribution to the LLC, and then have the LLC distribute some money back to the individual, however there there will be no interest deduction on the LLC side.

I don't see why in any on these 3 options you will create any embezzlement. The company veil also, while could probably be questioned by an opposing party, should not be pierced if proper documentation of the arm length transaction were kept.

Mike S. · Answer

@Ryan Bird

If you write a check to yourself instead, won’t you have to recognize in your income tax the interest that the LLC paid to you, and then deduct the interest on as investment expense?

If it is a single member LLC it would be much easier to recognize this payments in your books as a distribution from the LLC to keep the company veil intact.

Richard Heine · Answer

I have mortgages on several of my SFH rentals. The title is in my LLC and the loan, also.  Problem is banks are very risk averse on these things. If you dig deep in the fine print you pledge your personal assets like your primary in the fine print.  Not sure if this adds to the original question but it's hard to shield assets from a lender just because you have a nice LLC.  And I could not get the loan without the fine print.

David M. · Answer

@Mary Mitchell

That is interesting, but just confuses me more -- of course, why a qualified professional or two is required...  Originally, a personal mortgage was given to a lender for funds to purchase a real estate property.  The property was given as collateral for the note.  The Title to the property was taken in a personal name and mortgage was given in a personal name.  Now the Title was transferred to a legal entity.  The debt is still in a personal name.  Sure, the debt is backed by a piece of real property.  Assuming the holder of the note was never notified, the note hasn't been updated.  For example, should the holder of the note need to pursue foreclosure proceedings, they'd file against the person for the recouping the debt by trying to conduct foreclosure proceedings on the "person's property."  However, Title has been transferred (which is why I figured the Due on Sale clause makes sense) so the foreclosure proceeding gets stalled and has to be refiled.

Isn't this an investment tactic where you take Title to a distressed property but assume the mortgage without paying for it or something?  The holder of the note gets locked up in court for a year or two since they are trying to pursue foreclosure proceedings on the prior owner but the owner has already transferred Title to the investor (the investor is accepting a clouded Title).  its obviously something more of an "advanced" technique needing a good team of lawyers and a specific set of circumstances to make any money.

So, my point is now that Title and mortgage have separate owners, its already messy.  Anything you do is a band aid at best in my opinion.  From my personal understanding and all the various discussions on BP where peopled have asked about transferring personal investment properties into a LLC have always said never to split the names of the Title and mortgage.  Meanwhile, this isn't quite the right forum to be provided past court case decisions so I have no idea how any of this stands up in court (also probably because it varies State to State).

P.S.  I hope nobody considers my posting to be argumentative.  Just trying to have positive, constructive discourse while I'm hanging around inside my house trying to stay safe.

How to pay personal mortgage from LLC account with co-mingling

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