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Tax.appeal.168
Tax.appeal.168, Accountant
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My wife and I have an LLC taxed as a partnership using form

Customer Question

My wife and I have an LLC taxed as a partnership using form 1065. The business is for holding single family properties as rentals. We have a property with a private mortgage on it in which we pay monthly principal/interest to the lender which is a friend of mine. I was told to use form 1098 and give Copy C to lender and keep Copy B for our taxes but when looking at the form it wants an SSN as the Payer identifier so it looks like we cannot use this form. How do we report the interest being paid to the lender and what does the lender use to report on his taxes?
Submitted: 1 year ago.
Category: Finance
Expert:  Tax.appeal.168 replied 1 year ago.

Q1: How do we report the interest being paid to the lender and what does the lender use to report on his taxes?

A1: The person or business to whom the mortgage interest is being paid is the party that issues the Form 1098, not the person paying the interest. As you and your wife pay the interest, your friend, the lender should issue you a Form 1098. The Form 1098 will serve as his proof of income, and the Form 1098 serves as proof that you paid the interest.

In the section of the Form 1098 where it asks for recipient's federal identification number, the E.I.N. of the LLC is listed there. The Recipient is the name and address of the LLC. Again, you don't issue the form to your friend, the lender, he issues it to the LLC.

Let me know if you require further assistance with this matter.

Customer: replied 1 year ago.
I understand that he would issue the 1098 but I am helping on how to report it. The recipient/lender is the section that asks for the EIN. The payer/borrower is where the SSN is in the form. In my case the LLC is the payer/borrower and my friend is the lender/recipient as the form shows. My initial research was pointing that 1098 couldn't be used since the payer/borrower was a partnership and not a sole proprietorship. So I wasn't sure what to do when I saw that.
Expert:  Tax.appeal.168 replied 1 year ago.

I see in the Form 1098 instructions that it is not necessary to issue a Form 1098 to a partnership. The partnership will complete the Form 8825 and report the interest paid on it. If your friend, the lender is set up as an S-Corp, he can also use the Form 8825 to report the interest income.

Link to Form 8825/instructions:

https://www.irs.gov/pub/irs-access/f8825_accessible.pdf

Expert:  Tax.appeal.168 replied 1 year ago.

If your friend is not set up as an S-Corp, you can issue him a Form 1099-Misc. and report the interest amount paid to him in box 3 as Other Income. You file a copy of the 1099-Misc with the IRS, give him a copy and you keep a copy. As you will complete the Form 8825 and the Form 1099-Misc, to make sure that the IRS does not get confused, you may also want to complete a disclosure statement, Form 8275 to explain that the amount shown on the Form 8825 and 1099-Misc relate to the same interest paid and the interest shown on these forms should not be counted twice.

Link to Form 8275:

https://www.irs.gov/pub/irs-access/f8275_accessible.pdf

Link to Form 1099-Misc:

https://www.irs.gov/pub/irs-pdf/f1099msc.pdf

Let me know if you require further clarification.