Thanks very much for that detailed answer. But just to clarify on the first point, there are two LLC's, say LLC1 and LLC2, both owned by the same people in the same proportions. Mechanically speaking if LLC1 held both the properties and the securities*, and took out margin loans on the securities to finance properties, I would feel confident to enter the interest on the margin loans on Line 9 'Interest' under 'Rental Real Estate Expenses' on Form 8825 Worksheet for the properties financed, because as you say that's the purpose of the margin loans. In the actual case LLC2 would own the securities, no rental properties, and take out the margin loan, the proceeds of which, along with its excess cash (from securities distributions), it would lend to LLC1 to finance properties. In principle this should come out the same, and LLC1 would again record the interest expense on its loans from LLC2 on line 9 Form 8825, I assume. But how would LLC2 record the interest paid to it by LLC1 and the interest it (LLC2) pays on the margin loan, on Lines 7 and 15 of Form 1065 'business interest income' and 'business interest expense'?
*it wouldn't for protection of the securities from lawsuits arising out of real estate activities.
