Filing 1065 for LLC partnership that owns Rental Property

[TroyBoy2345]

I am currently in the process of filing the 1065 for my LLC partnership which was formed this year for a rental property. The LLC partnership holds the title to the rental property, while the mortgage for the rental property is held directly by the partners. I have 2 questions-

1) On our K-1 forms, should we omit Part II: Section K because the mortgage for the rental property is held directly by the partners and not by the LLC?

2) On our K-1 forms, should we include our share of the fair market value of the rental property as a capital contribution in Part II: Section L since the LLC partnership holds the title to the rental property?

I understand that a professional may be needed, but it would be great to understand this for my own sake. Any help is greatly appreciated, thank you!

[M-MTax]

This is a mess and you do need a tax pro. You are contributing an encumbered parcel of real estate to the LLC and the LLC is not liable for repayment of the mortgage making the interest on the note nondeductible. So each of you have only contributed the equity each of you owned to the LLC. You need a tax pro ASAP and get this straightened out with your lender.

[TroyBoy2345]

Thank you for the reply. To provide you with further detail-

1) The title to the rental property was owned by the LLC upon its purchase. This was done for liability protection going forward. However, the actual mortgage note is held by the partners themselves (no lender will give a mortgage to an LLC).   With that being said-

2) Wouldn’t we also include the mortgage interest expense on the 8825? Even though the mortgage note is held by the partners themselves (and not the LLC) we’re still paying the mortgage using rental income generated by the property.

[M-MTax]

Did the LLC PAY the mortgage? The LLC is a separate entity so it has to pay the mortgage in order to deduct the interest on the 1065. A lender WILL give a mortgage to an LLC if there are co-signers, which logically would be the partners.

[TroyBoy2345]

We paid the mortgage using the LLC’s business account.  So it seems as though the mortgage interest expense should be recorded on the 8825, yes?

[JeffreyR77]

Yes, it is a LLC expense that will be apportioned to the partners via the K1s.