We have some rental properties in a family LLC. It has some loans from banks. We have some securities similar or greater in amount to the rental properties. Margin loans against those securities could be an easier (banks really rake you over the coals providing documentation for real estate loans) and cheaper (rate tends to be lower) way to finance properties.
What if, the securities are put in a separate, second LLC? Then that LLC would borrow using margin loans and lend the money to the existing related party (both would have the same owners) LLC to buy properties.
I'm trying to figure out the basic tax situation in doing this, to decide if it's at all worth pursuing. If an individual takes out a margin loan, the interest is 'investment interest expense' deductible on Schedule A only if you itemize, among other limitations. But that would be a key limitation in this case because most of the LLC members don't itemize.
But, could the new 'lending' LLC instead consider the interest if got on loans to the other LLC to be 'business interest income' or 'passive interest income' and likewise treat the interest expense on the margin loan as 'business interest expense' or 'passive interest expense'? Bottomline question does this idea (or is there any other simple idea) allow the margin borrowing, which is ultimately for the 'passive' purpose of buying rental properties, to be deductible to the members who do not itemize on Schedule A?
