Question by Charlene S: Can I give a loan to my LLC for a tax deduction?
I purchased income property and put it in a LLC. Instead of getting a mortgage for the income property, I refinanced my house, took out cash, and paid for the income property in cash. I sold the house I refinanced 2 months later. Can I show a personal loan to the LLC for the mortgage I had on my house, so I can deduct the interest on my tax return for the LLC since I used my personal funds to buy the LLC?
Answer by taxreff
If I’m following the events correctly, the answer is no. The loan was not secured by the property purchased.
You may still be able to take a deduction for interest paid on the loan (I’m assuming its paid off now). However, the deduction would be on Schedule A, and it would be subject to the home equity loan limitations. That is because the loan was secured by your personal residence.
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Talk to an accountant before acting on any advice you read here.
To recap what I believe you said, for clarification purposes:
1) You refinanced your house, and took cash out of your equity.
2) You used this cash to form an LLC, and invested it as your initial capital
3) Your LLC purchased a piece of income property for cash
4) You later sold your house, and paid off all outstanding liens against it
1) Your LLC is a separate legal entity from your person
2) You own 100% of the LLC
You want to charge interest to the LLC for tax purposes.
You could do this, but it won’t help you. Since you are 100% owner of the LLC, it would work like this:
1) LLC pays you $ 10,000 (example) in interest and takes a tax deduction
2) LLC gives you a 1099-INT reporting the interest it paid to you
3) You pay tax at regular income tax rates on the interest that you received from the LLC
4) End of year, LLC reports your share of income less the $ 10,000 in interest expense to you.
If you run the LLC as a corporation, and it is subject to corporate income taxes, you have accomplished the following:
1) Reduced the corporate income tax liability by $ 10,000
2) Increased your personal income tax liability by $ 10,000
3) Reduced your dividend by $ 10,000
4) Made a lot of extra work for yourself for a negligible tax savings.
Corporate taxes are higher than personal taxes, but I think that you would be hard-pressed to structure this in any way the benefits you. In fact, the mere accounting work of keeping up with the transaction and reporting it everywhere would likely generate fees far in excess of any tax savings.
I would not recommend that you run the LLC as a corporation anyway, because there is no real benefit to doing things this way. If you wanted to do all the extra paperwork and pay taxes, you should have set it up as a corporation.
If you don’t run the LLC as a corporation, which I assume you really do not, all income and expenses flow through to your personal Schedule C anyway, so there is no benefit to charging your LLC interest.
In short, if you move your wallet from your right pocket to your left pocket, have you made any money? If a CPA charges you to track the movement of your wallet, have you benefitted?
That’s the crux of what you are asking.