All Forum Posts by: Lisa Marie

@Alex Morrison I am in a similar situation as you are. My husband and I created an LLC to buy a rental property. We are using a combination of our savings and a HELOC drawn from our primary residence. When we set up the LLC, we wrote the Operating Agreement specifying the capital contribution amount -- $500k total, $250k from each person. Then we transferred $200k of our savings to the LLC's checking account, plus $300k of the HELOC money. On paper, we recorded it as capital contribution of $500k from the two members. (As far as LLC is concerned, it doesn't care where the money comes from. I had thought about contributing $200k capital and making the LLC taking a $300k loan from us, but based on my research, that will actually be a much more complicated transaction in terms of paperwork and tax filing. So we decided to keep it simple and make every $ we put in a capital contribution.)

Now the LLC has $500k capital, and that money is used to buy a property, pay for expenses and etc. This is where we are at right now -- bought the property, no income yet. So everything I said so far was facts, and everything I will say below is my projection.

When the property starts to generate income, we can take the money out as distribution or leave it in the LLC's checking account. We have to keep an Excel file to track our Capital basis. Let's say the first year it collects $50k rent, minus $25k expenses, and another $15k capital depreciation. So the net income is $10k, which means each of the members' capital basis increases by $5k -- now we each have $255k capital. We can withdraw up to $25k (that's the net cash flow, because the $15k depreciation is only on paper). If we do that, each of our capital basis is now down to $242.5k. The $25k can be spent by us in any way we want, but hopefully to pay down the HELOC. The $10k from the LLC will be on the 1040 tax return via two K-1s, one for me and one for my husband. Whether we take the money out or leave the money in, whether we take out $25k or $10k or $1k, it has no impact to our tax, because LLC is a pass-through entity. The only impact is our capital basis in the LLC.

And based on my research, the interest payment on the HELOC is still tax deductible.  I know IRS tightened the law on deducting HELOC interest payment in recent years, but I believe if we make it very clear through record keeping that the entire HELOC money is spent on buying a property, it's still deductible.  Look up "Interest Tracing" as a tax topic.  

I am a housewife and certainly has no formal education in tax or accounting.  What I said above was based on my research online.  I would appreciate you or anybody else on BP to critique.  If my understanding is wrong in any area, the sooner I know about it the better it is.  :-)

@Sachin Maskey Check out Blue Vine. It's a 100% online bank for business. I had my LLC's business checking account with AZLO before, but since AZLO is closing down, I moved it to Blue Vine.

@Ashish Acharya @Eamonn McElroy, thank you both for the reply. I have a related question: we are taking out a HELOC against our primary residence to finance the purchase of the rental property. Based on my research, the interest payment on the HELOC is not tax deductible because the funds are not used for improvement of the primary residence. Is there any way we can get a deduction on the HELOC interest on our 1040? If it's truly not tax deductible, we may start looking for a HELOC for the rental property. When we use the proceeds from the new HELOC to pay off the first HELOC, how does that impact the tax? Let's use the same numbers:

Each member has $250k capital. Take a HELOC on the rental property and got $300k. Do a capital distribution of $150k each to the members. Is this a non-event regarding tax? That way the member's capital contribution is back down to $100k each, and the LLC is now paying for the HELOC interest, which is deductible against the rental income. (However, the HELOC interest on the rental may be higher than the HELOC interest on our house. So we will have to do the math.) Am I on the right track? Any other idea that may be more tax advantageous?

Hi, my husband and I are 2 members of an LLC (treated as a partnership). We decided that it's easier to buy a rental property using cash instead of trying to find a mortgage under the LLC name. We have some cash savings, but don't have enough. We are planning to take out a HELOC against our primary residence, and put that money into LLC. The question is: is it better to treat the infusion of HELOC money as additional capital contribution or as a loan?

To make it easier to understand, here are some numbers (not exact numbers in real world):

Husband and wife, each contributed $100k to LLC as capital contribution -- $200k in LLC to start. Needed $500k to buy a house, so we were $300k short. Took out a HELOC against primary residence to get $300k. To properly record the infusion, we can treat it as (1) Additional $150k capital contribution by each member, so the LLC capital is $500k; or (2) A loan of $300k by the members to the LLC.

Is there a difference in either approach, as it relates to tax or legal protection? The loan repayment is irrelevant to the Profit/Loss calculation of the LLC, right? So the only thing that impacts the P&L is the loan interest payment. However, since the LLC as a partnership is a pass-through, whatever interest payment made by the LLC (as an expense) is an income to the members, so it all washes out at the end, when everything is aggregated on the 1040, which will be married filing jointly.

I know every person who responds to this post will say "talk to a CPA".  I understand the value of a CPA, but part of the fun of being on BP forum is to educate myself and learn things, so that I don't have to rely on my CPA all the time, not to mention that he does charge me by the hour. 

@Christopher Smith I tend to agree with you that it's always better to have full control of my own taxes. My husband and I are about to purchase our first property this month under our LLC. Since we will only have 1 property and it's managed by a PM, I am definitely leaning toward doing my own tax.

Do you use Turbo Tax Business? Is it about the same user-friendliness as regular TurboTax? Does it allow you to file multiple state's return? (We live in one state but the LLC and the rental property is in a different stage, so based on my research, we will have to file a federal 1065, then 2 separate state returns, one for the state where the LLC/property is located, and the other for the home state where we live.)