Private loan interest deduction

Forum|Forum|5 years ago
September 1, 2020
3 replies
8 views

Hello,

I have a very specific and semi unusual question.

I am buying a commercial rental house from the two relatives. They each will be providing me a private loan to finance my buying of the house in the amount of their respective share of the house. I will be buying the property through a recently established LLC.

The questions are:

I believe I can deduct the loan interest off of my operating expenses? Is this correct? Is there anything special that I need to setup in the contracts?

On the flip side, I believe the sellers will need to claim the interest paid to them through the loan as income?

Will we need to setup 1099s for this interest income, or is it sufficient to just report the amounts on our taxes with no official form, just our personal leger that we used to track the principle and interest paid through the year?

Thanks,

POW

Rental Property

mellish7777

Level 5

They have to report the interest as income and you can deduct the interest you paid them and keep in mind that the interest has to be at the market rate. A 1099INT is only issued when payments are made in the course of a trade or business and that's not happening here.

Anonymous

the loans should be supported by written documentation. Things happen and then you could end up in court. it then becomes a case of you say relative says and the judge is the one who flips the coin. Free documents are available on the web.

Opus 17

Level 15

You can deduct the interest on any loan that is used for business as a business expense, whether from a private lender or a bank. The most important part is to keep your documentation that shows you can trace the interest payment back to the specific business purpose, and don't mix loans.

(For example, you can even deduct credit card interest if you use the credit card for business purposes, but as soon as you put personal expenses on the same card, the interest becomes mixed up and the IRS would not look favorably on continuing to deduct the interest as a business expense.)

timothyyoungs

Level 2

I'm in a similar boat. I borrowed from a family member to purchase an investment property. The private loan is at the current market rate for interest, and we have a signed agreement.

I would like to enter the interest that I am paying, but I don't know how. TurboTax has two fields for Lender and amount of interest paid. Do I just enter the individuals name? Or should I record it somewhere else?

Thanks!