Tuesday, February 18, 2014

When a home is owned by an LLC / deducting the interest on the loan the same way we would if the home were in our names and we had a traditional personal mortgage?

James A. Lawrence for NorthJersey.com writes: Q. My home is in the name of an LLC, with my wife and me as the members of the LLC. We have a commercial mortgage on the property. Can we deduct the interest on the loan the same way we would if the home were in our names and we had a traditional personal mortgage?

In general, interest can be deducted only by the person (or persons) liable for the underlying debt and who holds the title to the property. If you transferred title of your home to the LLC, you may have jeopardized the tax benefits of homeownership. You still may be entitled to a deduction for the mortgage interest payments, but only if you are the legal or equitable owner of the property.

Taxpayers become the equitable owners of mortgaged property (allowing them to deduct the mortgage interest on that property) when they assume the benefits and burdens of ownership. To determine whether these benefits and burdens have been transferred to a taxpayer, the IRS often considers whether the taxpayer:

* Has the right to possess the property and enjoy its use, rents or profits
* Has a duty to maintain the property
* Is responsible for insuring the property
* Bears the property's risk of loss
* Is obligated to pay the property's taxes, assessments or charges
* Has the right to improve the property without the consent of the owner (the LLC)
* Has the right to obtain legal title anytime by paying the balance of the purchase price.

If you don't meet these seven qualifications, you would probably not be able to take the payments as qualified mortgage interest deductions on your personal tax return. You may also lose other federal tax benefits available to you as an owner of a principal residence, such as the real estate tax deduction and the $500,000 capital gains exclusion for a married couple upon sale of the home.

However, the state of New Jersey allows you the normal personal tax benefits, such as a residential deduction on your New Jersey personal tax return, a homestead rebate and the state tax freeze program. This could be accomplished only if you held the majority of the ownership in the LLC, which you do. However, when it comes to selling your home, New Jersey follows the federal tax position, meaning you could lose your $500,000 exclusion.

You might consider putting the LLC in just one of your names. If a residence is owned by a single-person LLC, the LLC could be treated as a "disregarded" entity, which is treated as if it is an individual taxpayer, for all federal tax purposes. The homeowner benefits (such as interest, tax deductions, and capital gain exclusions) may apply to a residence owned by a single-owner entity.

James A. Lawrence is a certified public accountant with Traphagen Financial Group in Oradell and a member of the Bergen County Chapter of the New Jersey Society of Certified Public Accountants. Chapter members are volunteering their time to answer readers' tax questions until April 15.