Seeking Advice on Handling Mortgage Payments for LLC-Owned Property

[Daniel M.]

Hi BiggerPockets Community,

I'm having trouble managing mortgage payments for my rental duplex property and could use some advice from those who have dealt with similar situations.

Background:

• The mortgage for our rental duplex is in my and my wife's names.
• Our LLC holds the property deed via a quitclaim.
• We set up a business checking account for the LLC to receive rent payments and manage property expenses.

The Problem: The bank requires that mortgage payments be made from an account in my and my wife's names, not from the LLC's business account. I would prefer to manage everything through the LLC's account for bookkeeping and tax purposes.

Proposed Solution:

1. Open a new joint personal account specifically for making mortgage payments.
2. Transfer the monthly mortgage payment amount from the LLC's business checking account to the joint personal account.
3. Document these transfers as "Owner's Draw" or "Owner's Distribution" in our accounting records.
4. Use the joint personal account to make the mortgage payments.

Questions:

1. For the CPAs and accountants out there:
   • What are the tax implications of this approach?
   • How should I classify these transfers in our books?
   • Are there any best practices for maintaining accurate financial records and documentation for these transactions?
2. For the attorneys and legal experts:
   • What are the legal implications of transferring funds between the LLC and personal accounts?
   • How do I ensure compliance with the LLC's operating agreement and state laws?
   • Are there any potential liability issues that may arise from this arrangement?
   • How can I ensure that our payment method complies with the loan agreement terms and the bank’s requirements?

I would appreciate any insights or experiences you can share on handling this situation correctly from an accounting and legal perspective. Thank you in advance for your help!

[Daniel M.]

Thank you for your feedback and raising these concerns. Here are the insights from my attorney and CPA:

From my attorney:

Your approach is perfectly legal and reasonable.

From my CPA:

Your approach of opening a joint account to pay the mortgage with the deposit coming from the LLC is the correct way. The transfer should be a credit to the bank account, but the debit should be to Loan Payable for the principal amount and interest, and the rest to insurance and taxes.

The LLC is a disregarded entity for IRS purposes and uses the owner's Social Security number to report on Schedule E, page one. Since the loan interest will be deductible whether it is in your name or the LLC's name, the LLC is for legal protection only and means nothing to the IRS.

I don't foresee any problems with the IRS with these trails of documents.

I appreciate your concern and suggestions. We will continue to monitor our practices to ensure compliance and protect our interests.