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A newly form partnership purchase real estate residential…

Hi Steve,A newly form partnership...
Hi Steve,A newly form partnership purchase real estate residential rental in 2017. The partners (husband and wife) are foreigners (Canadian). They took out a mortgage from their Canadian home and purchase the real estate rental in the USA partnership. I don't think they can deduct the mortgage interest in the USA return. Can you confirm that? The interest would be treat as investment interest in their personal return but I don't think it can directly offset the rental income.
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Answered in 2 hours by:
3/9/2018
Lev
Lev, Tax Advisor
Category: Tax
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If the loan was used to purchase a rental property - the interest on THAT loan may be deducted as rental interest.

That is not an issue.

There is no requirements to use the rental property as a collateral as long as the loan is clearly related to purchase.

That actually means - loan proceeds were contributed into the partnership within 30 days after the money were provided.

If loan proceeds were partially used for rental activity - and partially for other reasons - then need to apportion and ONLY rental part will be deducted.

Because the US partnership is NOT paying that loan directly - on the partnership books - it will be reported a reimbursement to the partner.

Is that Nevada partnership?

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Customer reply replied 1 month ago
Hi Lev,That is a partnership in MI and the rental is locate at MI as well. Based on what you state above, they still can deduct the mortgage interest on the rental directly. so in accounting term. the following entry will be done. please confirm
Dr Cr
Interest expenses XXXXX
Capital contribution XXXXX

I do not see any issues to deduct interest - it it was clearly used for that purchase.

You may treat additional interest expenses as partner's capital contribution - that is OK

But it might be more clear to have that interest reimbursed to partners when paid.

But that will not make much difference - you may treat it as additional capital contribution.

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Customer reply replied 1 month ago
Lev,Shouldn't we record the loan on the book as well. It would like funny that there is interest expenses but no loan on the balance sheet. Should the loan be also record?

Because the loan is not on partnership books - you may not record it.

These are interest expenses of the partner paid in relation to the partnership and which are reimbursed by the partnership.

That might be not standard items on books - but that what we have.

Lev
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Customer reply replied 1 month ago
Thank you Lev
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