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Old 04-29-2014, 02:25 PM
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Mortgage Rental Prop A to buy Prop B - Tax Implications

Hello -

I have a residential rental (prop a) that I put on SchE and it is paid off (no current mortgage). It is not in an LLC and I rent to relatives at fair market price.
I am interested in purchasing a commercial office building (prop b) to rent to Dr. and also to my spouse's PLLC under her Sch C, and we are married filing joint.
When I mortgage prop a to buy prop b, can I take the deduction for prop a as interest on the prop a part of the sch e? Also, can I enter on sch e the mortgage for prop a even though I am using the funds for another purpose (to buy prop b)?

Also, is it best to take the money and loan it to the LLC that I will form to purchase prop b, so I can charge the LLC interest, and deduct that interest? It will be flowing back to self, but since my spouses PLLC will be paying some rent it will reduce her sch c income and self employment tax.

Also, since Prop B will be a medical office rental and there will be two Dr. s in there (one is my spouse), I am wondering if I should still do this under a Sch E, or move to Sch C.

Thanks


Last edited by synchro : 04-29-2014 at 02:28 PM.


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Old 04-29-2014, 08:58 PM
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Quote:
Originally Posted by synchro View Post
Hello -

I have a residential rental (prop a) that I put on SchE and it is paid off (no current mortgage). It is not in an LLC and I rent to relatives at fair market price.
I am interested in purchasing a commercial office building (prop b) to rent to Dr. and also to my spouse's PLLC under her Sch C, and we are married filing joint.
When I mortgage prop a to buy prop b, can I take the deduction for prop a as interest on the prop a part of the sch e? Also, can I enter on sch e the mortgage for prop a even though I am using the funds for another purpose (to buy prop b)?

Also, is it best to take the money and loan it to the LLC that I will form to purchase prop b, so I can charge the LLC interest, and deduct that interest? It will be flowing back to self, but since my spouses PLLC will be paying some rent it will reduce her sch c income and self employment tax.

Also, since Prop B will be a medical office rental and there will be two Dr. s in there (one is my spouse), I am wondering if I should still do this under a Sch E, or move to Sch C.

Thanks
I am interested in purchasing a commercial office building (prop b) to rent to Dr. and also to my spouse's PLLC under her Sch C, and we are married filing joint.========>>>>>>>>>>>>Not under MFJ situation, even when both of you own the property jointly, you may deduct rent paid to your spouse for your use of her part. Similarly, she may deduct rent paid to you on her SCh C as rent exp. Your spouse could deduct the rent even if she paid to you for her use of your jointly-owned property.You report the rent as income. When others tried to do this on joint returns, the IRS said "no" and claimed in various private letter rulings that the husband and wife rent deduction applied only to separate returns.
When I mortgage prop a to buy prop b, can I take the deduction for prop a as interest on the prop a part of the sch e?=============>>>>>>>>>>I guess then you can deduct mort interest paid on the pro B on Sch E,NOT on Pro A aslongas you pay it on Pro B.

Also, can I enter on sch e the mortgage for prop a even though I am using the funds for another purpose (to buy prop b)?================>>>>>>>>>I do not think so as you are using the mortgage for the purchase of Pro B,NOT pro A.

Also, is it best to take the money and loan it to the LLC that I will form to purchase prop b, so I can charge the LLC interest, and deduct that interest? ==========it depends how the personal loan monies are received by the LLC. In accounting the LLC is treated as a separate entity distinct from the owners. So, the LLC must consider how the money from YOU is being received into the company.If there is no loan agreement between the LLC and you, then the money would be treated by the LLC as investment funds and recorded as equity in the accounts. If there is a loan agreement between the LLC and the owner then the monies would be treated as debt funds and become a liability of the LLC in the accounts.Equity funds do not attract interest. Equity funds entitle investors to dividends or a share in the profits. Debt funds do attract interest which would then make it a legitimate business expense of the LLC in accounting terms. Now sadly, tax law does not always follow accounting concepts. So while interest on a loan provided by the owners is a business expense from an accounting point of view, it may not be accepted as such by the tax department; they all accept interest on loans as legitimate tax expenses provided the loan is taken out by the LLC on standard commercial terms.

So, to satisfy both the accounting and the tax department requirements it would be good to document and execute a loan agreement between the LLC and yourself and make sure the terms of the loan agreement are framed in an 'arm's length' way .To execute the loan agreement you may be actually signing it as both director of the LLC on one hand and the loan funder on the other.

Also, since Prop B will be a medical office rental and there will be two Dr. s in there (one is my spouse), I am wondering if I should still do this under a Sch E, or move to Sch C.============>>>>>>>>unless you are a r/e pro you nust need to report rental income Sch E. Generally, Sch C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer.



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