How do I record mortgage interest deductions on partner's personal loans for a rental property moved into a partnership LLC?

[awaynenichols]

Hello all, I've googled a good bit and can't find an answer to this question. Thanks so much in advance.

I and two other individuals jointly purchased a single family home for renting. All three of used individual loans to finance our contributions to the purchase price.

Immediately after, we transferred this property into a partnership LLC for liability purposes. Now, I'm using turbotax business to fill out the 1065/k-1s, and I'm confused about how to handle each partner's interest deduction.

Since the partners are technically the debtors, not the LLC itself, I'm assuming it is not correct to record the mortgage interest amounts on the 1065. Additionally, I don't see a way in turbotax to break down the interest deductions differently by each partner.

In this case, the k-1 sent to each partner would not take into account the interest deduction, and the partner would need to specify the deduction in his/her personal return? Is this the correct way to handle it, and if so, where should the deduction be listed in the personal returns?

Thanks again!

[Rick19744 · Accepted solution]

You need to consult with a tax professional to get this structured properly.

1. Your facts don't specify if you have transferred the title to the LLC.  This issue needs to be addressed.
2. Your facts appear to indicate that the debt is still at the member level.  If the debt is not at the LLC level, you are now making distributions to the member's to pay the debt.  Not ideal.
3. Based on the limited facts, as noted above, it does not appear that the debt followed the contribution of the property.  As noted in comment 2, this would mean that there is no interest deduction at the LLC level.
4. If the debt does get shifted to the LLC level, then you need to make sure that each member does not have any debt shifting as this may have tax implications.  To avoid this, you need to have this addressed in the operating agreement.

Multi-member LLC's are far more complex than taxpayer's realize and have many traps for the unwary.  Once again I recommend you consult with a tax professional to make sure that you get started down the right path.

Not too many things worse than getting hit with the audit lottery and realizing that you have tax implications that could have been avoided.  Not an area to be penny wise pound foolish.