Hi, my wife and I have a mortgage for our primary home which includes a secondary unit on the property that we short term rent. The secondary unit is managed by our LLC which in turn pays us a lease fee for the secondary unit. How do we handle our mortgage interest deduction? Does a portion of the interest get assigned as an expense on Schedule E where we list the lease income from the LLC? Do property taxes work similarly?
@Washem2015 while I have no familiarity with the functions & screens of the on-line product, what should happen here
(a) assuming equal square footage between the main-home unit and the rented out unit, 50% of the mortgage interest and 50% of the property taxes belong to the LLC entity ( what type is it -- single member / partnership / corporation S or otherwise -- for tax purposes ).
(b) Your individual return covers your unit only. Note that for purposes of the mortgage interest ( if you are using itemized deduction, the principal remaining is half of the total amount.
(c) Depending on the type of entity ( the llc is ), you may have to file a Schedule-C or Schedule-E to cover the income and expenses of the income unit. And issue a K-1 to your self .
Is there more I can help you with ?
@Washem2015 while I have no familiarity with the functions & screens of the on-line product, what should happen here
(a) assuming equal square footage between the main-home unit and the rented out unit, 50% of the mortgage interest and 50% of the property taxes belong to the LLC entity ( what type is it -- single member / partnership / corporation S or otherwise -- for tax purposes ).
(b) Your individual return covers your unit only. Note that for purposes of the mortgage interest ( if you are using itemized deduction, the principal remaining is half of the total amount.
(c) Depending on the type of entity ( the llc is ), you may have to file a Schedule-C or Schedule-E to cover the income and expenses of the income unit. And issue a K-1 to your self .
Is there more I can help you with ?
@pk , thank you for the response!
To clarify, the LLC is a partnership (my wife and I are equal partners). Regarding (a), is square footage the only or preferred method of splitting mortgage interest and property taxes? Or would an appraisal that identifies the value of the primary home vs. secondary unit be acceptable?
(b) Yes, our situation involves itemizing. Assume the remaining mortgage principal is 800,000 (and your previous example of equal square footage between the primary home and secondary (50% and 50%), then we list our remaining mortgage principal on our individual return as 400,000. Thereby avoiding the 750k cap on mortgage interest deduction?
(c) The LLC files a 1065 and issues K1s to me and my wife for the short term rental activity. The Schedule E is only for our lease of the secondary unit to the LLC. This is what you would expect, correct?
Thank you!
You can split the rental portion based on percentage of appraised value.
You have the mortgage interest deduction correct. Your percentage vs the rental percentage divides the deduction.
You are doing fine with the 1065 and the schedule E. That is exactly what @pk was talking about.