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Dave CPA
Dave CPA, Accountant
Category: Tax
Satisfied Customers: 840
Experience:  Vast knowledge within the accounting/tax industry
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We got a Home Equity Loan for our house to get the cash to

Customer Question

We got a Home Equity Loan for our house to get the cash to loan to my husband's Sch. C business. His Sch.C business has been paying the monthly mortgage payments. What is the best way to handle this for tax purposes? I know interest expenses are deductible for Sch. A. Can his business expense the whole payment? Or is the interest payment reported on his Sch.C?
How about the expenses paid to get the HEL? Should we draw an agreement for the loan to his business? Our house is included in a family revocable trust. We are grantor and trustee.
Submitted: 1 year ago.
Category: Tax
Expert:  Dave CPA replied 1 year ago.
Hello,

The easiest way to show this would be for the interest to be deducted on schedule A and not part of the schedule C. Since the loan was made to you and not the business, it would not be best for the business to reflect the expense. In addition, by the business capturing the expense you would be decreasing the self employment tax, which you don't want to do.

Below is the definition of Home Equity Debt per the IRS and since your schedule C company doesn't own the home used as collateral, they can't justify the interest expense.

Home equity debt is a mortgage you took out after October 13, 1987, that:

Does not qualify as home acquisition debt or as grandfathered debt, and

Is secured by your qualified home.

Drawing up a loan to the business from the family would then force the family to recognize interest income on that loan, which I don't think you want to do.

The expenses paid to get the HEL would be deducted on schedule A as well if they pertain to points. Since the loan was not to improve your home, you have to amortize the expense over the life of the loan. So if the expense was $3,000 and the loan was for 30 years, you would deduct $100 a year.

Below is a link to the IRS that has some information on interest deductions on mortgages and their related expenses, which you might find informative.

http://www.irs.gov/publications/p936/ar02.html#en_US_2011_publink1000229991

The fact that this house is included in a trust doesn't impact this answer.

Let me know if you have any questions before you rate my answer. A positive rating is what I strive for.
Customer: replied 1 year ago.

Hi Dave,


 


Thank you for your answer. But your explanation is too vague or I just don't understand. You gave websites for me to research. If I have to do that, I wouldn't ask you any questions here. So I feel that you are not meeting my satisfaction. Would please explain the laws and reasons behind in the simplest terms for me? Thank you.


 


Why would you not want to reduce SE tax? Why reducing SE tax is not desirable? Wouldn't you rather pay less tax than more legally?


 


Why not draw a loan documents? Can you tell me pros and cons of drawing a loan documents? Is the loan documents valid if it wasn't drawn by a lawyer? If there is a loan document, can the whole payment of the loan monthly can be expensed from the Sch.C?


Granted then the interest income need to be picked up by us, what's the net benefit for doing that treatment?


 


I am sure there are more people, who took out the HEL to loan to self employment business. HEL gives better loan rate and moreover many Sch.C business don't qualify to get any business loans.


 


Thank you, Dave.

Expert:  Dave CPA replied 1 year ago.

Hello,

 

I provided the IRS information as backup to support my statement. So customers like to review it for themselves. I apologize if you didn't find it helpful. Let me try and address your concerns point by point.

 

Why would you not want to reduce SE tax? Why reducing SE tax is not desirable? Wouldn't you rather pay less tax than more legally?

 

The reduction of your SE tax is not correct because it is being done by claiming a deduction that you are not entitled too because it doesn't qualify as the business's expense and there for the deduction would be taking in error. This error would reduce you liability incorrectly and that is not what you want to. A reduction in your SE liability is usually desirable via deductions that you are entitled too.

 

 

Why not draw a loan documents? Can you tell me pros and cons of drawing a loan documents? Is the loan documents valid if it wasn't drawn by a lawyer? If there is a loan document, can the whole payment of the loan monthly can be expensed from the Sch.C?

 

If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used

 

This interest isn't treated as a business expense.

 

Granted then the interest income need to be picked up by us, what's the net benefit for doing that treatment?

 

Per the IRS rules noted above this isn't allowed for this type of transaction.

 

 

The botXXXXX XXXXXne is that the interest deduction should only be captured on your schedule A or your 1040.

 

Please let me know if you need any further clarification and I wish you the best of luck.

Dave CPA, Accountant
Category: Tax
Satisfied Customers: 840
Experience: Vast knowledge within the accounting/tax industry
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