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If I buy a house using my LLC (for limited liability since…

If I buy a house...
If I buy a house using my LLC (for limited liability since I'll rent out part of the house) and use it as my primary residence, do I still get to deduct the mortgage interest against my personal income?
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Answered in 1 hour by:
9/10/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,968
Experience: Taxes, Immigration, Labor Relations
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You will be able to deduct mortgage interest regardless if teh property is titled to you personally or to the single member LLC.

That is because a single member LLC is classified as disregarded entity for income tax purposes.

For deduction purposes - the mortgage is a secured debt on a qualified home in which you have an ownership interest.

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home.

If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply.

  • The rented part of your home is used by the tenant primarily for residential living.

  • The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities.

  • You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant.

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Customer reply replied 9 months ago
Thanks. Quite clear. A related question:If I buy the property as my primary residence (either using my name or my single-member LLC) with a friend who pays the down payment, can I still deduct the interest? The mortgage will be take out by me and secured against the house. This friend does not live in the house.

Home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home).

That makes no difference if you are co-owner - as long as your name is ***** ***** the title - you may deduct mortgage interest you paid.

If mortgage interest paid by another co-owner - you may not deduct that interest.

If mortgage interest paid partly by you and partly by another co-owner - you may only deduct a part paid by you.

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Customer reply replied 9 months ago
Understood. I'll deduct my portion of mortgage payment.A related question:If that friend also deducts his portion of the interest, I suppose he can deduct in the same way as I do. The question is: can each person (he and I) deduct up to the max of the interest on $1m loan or the two combined deduction is $1m? The total loan probably is $2-2.5 million.

Correct - you will deduct a portion of mortgage interest that YOU actually paid.

If you paid 100% of mortgage interest - you may deduct the full amount.

Another co-owner will do the same - he will deduct the portion he actually paid.

.

Regarding the limit on mortgage interest - that limit applies to both - the property and to the person.

Thus if the total loan is above $1m - only a portion of the loan is deductible - and after that limitation is applied - you will divide deductible mortgage interest between co-owners.

After that (if you have several qualified properties) - that limit will be applied to you personally again.

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Customer reply replied 9 months ago
just to make sure, if the mortgage is $2m, and it is shared 50-50 by two of us, each of other can only deduct interest for $500k?

Some additional research based on your question

Here is a most recent document

https://www.irs.gov/pub/irs-aod/aod-2016-02.pdf

The IRS applied $1.1m limit as per property basis and partially disallowed deduction for each co-owner.

Moreover - the Tax Court agreed with the IRS, finding that limitation may be claimed in relation to the qualified residence, rather than in relation to an individual taxpayer.

HOWEVER - the Ninth Circuit where taxpayers appeal (Voss, 796 F.3d 1051 (9th Cir. 2015) reversed the Tax Court's decision - allowing each unmarried taxpayer to deduct interest on up to $1.1 million of debt on a qualified residence.

Sorry for original confusion.

Please understand the complicity of your question.

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Customer reply replied 9 months ago
That is very helpful! So if I do buy a property with another person, I'll show my own CPA the 9th Court ruling and deduct $1m by myself (my co-buyer would do the same too). I greatly appreciate your due diligence for the research.
Customer reply replied 9 months ago
I'll leave this question open for a couple of days, in case I can think of another aspect of the issue.

That is correct - as long as you and that another person are unmarried individuals.

Regardless that later court ruling - legally it affects ONLY states within that Ninth Circuit

See here

https://www.ca9.uscourts.gov/judicial_council/what_is_the_ninth_circuit.php

HOWEVER - the IRS re-evaluated their position and decided to accept that treatment for all federal tax purposes.

See IRS document I referenced above - and that you will need to use when teh issue is discussed with your CPA.

Lev
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Customer reply replied 9 months ago
That's a great discovery by you!
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