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About Dan Lively
Expertise
I can answer questions regarding personal, corporate, partnership, estate and gift taxes. These questions can relate to problems, compliance, or planning. I am well versed in IRS audit and collection procedures and can respond to questions you may have in this area as well.

Experience
I am an attorney in the state of CA that is certified as a tax specialist by the State Bar of California Board of Legal Specialization. I am also a Certified Public Accountant, and have an LL.M in Taxation. Further, I am an adjunct professor of taxation at Whittier College of Law.

Organizations
Orange County Bar Association American Bar Association Orange Coast Estate Planning Counsel American Association of Attorney/CPA's California Bar Association

Publications
Apartment Journal Taxing Advice California CPA Journal

Education/Credentials
LL.M (Taxation) - Chapman University College of Law JD (Law) - Western State University College of Law BS (Accounting) - California State University, Northridge

Awards and Honors
• American Jurisprudence Award – Federal Taxation • American Jurisprudence Award – Wills • American Jurisprudence Award – Estate Taxation • Cal Jur Award – Partnership Tax • Cal Jur Award – Corporate Tax • Cal Jur Award – Tax Procedure

You are here: Experts > Business > Corporate Law > Tax Law (Questions About Taxes) > 2-member LLC for rental property

Tax Law (Questions About Taxes) - 2-member LLC for rental property

Expert: Dan Lively - 11/4/2009

Question
Hello,

I set up a 2-member LLC with my father and I as members, so we can purchase rental properties as 50/50 partners. We are in the process of purchasing our first duplex to start the business. My bank will not write a mortgage in the name of the LLC (even with both members signing as co-signers), so I have to get the mortgage in my name. I will be paying the mortgage payments from a business account in the name of the LLC. How can I claim the mortgage interest on the LLC's return, so the interest deduction is split with my father? The bank will report mortgage interest on the 1098 using my personal social security number.

Thanks!
Matt

Answer
I will assume that the property title is held in the name of the LLC already. I will also assume that you bought the property in your name originally to match the loan documents. Therefore, you contributed property to the LLC that was encumbered. I will also assume that the LLC is being taxed as a partnership.

When you contributed encumbered property to an LLC, under Section 752 an adjustment is made to your outside basis, and gain is possibly recognized. The LLC will have to assume the loan, which decreases your liability, and is a deemed distribution of cash from the partnership to you. Your father will have a deemed contribution of cash for his assumption of his share of the liabilities. Any decrease in your share of individual liabilities is netted against any increase in your share of partnership liabilities arising from the same transaction.

In determining the amount of gain recognized by you (if any), only the net decrease in your liabilities is counted. The deemed cash distribution resulting from a net relief of liabilities reduces your basis in your partnership interest, and to the extent that the deemed cash distribution exceeds outside basis, you recognize gain (usually capital).

Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

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