Lend personal HELOC money to personally-owned LLC?

[Troy Otte]

Hello BP community. New to the site and first post. Given the recent changes to the federal tax rules/rates, I have a question regarding funding investment properties with personal (HELOC) money lent to my personally-owned LLC. Here's the idea:

-My wife and I own our primary residence with a good amount of equity. We also own a rental property in a LLC owned entirely by us paid for in cash worth ~$300K.

-We're looking to either purchase a property to flip, or another rental property, and like being able to use cash for the transaction for the speed of closing, negotiating power, and lower transaction fees. We will buy it under our LLC name for the legal protection, and now the tax benefit since the recent tax rule changes regarding pass-through entities.

So, here's the idea. We could get a HELOC on our primary residence for the funds needed to buy a property. Establish a loan agreement between ourselves personally and our LLC, whereby our LLC borrows from us personally at a normal commercial loan market interest rate. The LLC uses the funds to buy the property. Here are the benefits I think it provides:

1. We will get a lower interest rate on a HELOC than on a commercial loan. Let's say we pay 5.8% on the HELOC (today's rates on Bankrate.com). We could lend it to our LLC for 8-10% interest and make money personally by lending the HELOC money to our LLC at a higher interest rate.

2. The interest on a HELOC is not tax-deductible (under new tax rules), but the interest paid on a loan by our LLC is. So, we'd be able to deduct the interest on the loan from us personally inside of our LLC.

3. By making the purchase through our LLC, we're able to take the first 20% in profits as a deduction on our personal income taxes due to the recent tax rule changes on pass-through entities.

I hope the above makes sense, and there's a chance that what I'm suggesting violates laws/rules I'm not aware of.  Looking for the community's insight and knowledge.  Thanks in advance for any feedback!!

[Natalie Kolodij]

Hey @Troy Otte Good news!

You're making this 50 steps harder than needed. 

HELOC interest is not deductible any longer for personal use.

However it IS still deductible for business use. 

The IRS allow what's called interest tracing. This means that as long as you can trace that the proceeds of the HELOC were used to acquire/improve a rental property- you can deduct the interest against that property.

Best practice is just to ensure that the money never hits your personal bank account if possible. You want it to go directly into the LLC/Rental account and be as cleanly "traced" as possible.

Feel free to reach out if you have more questions!