Living off loan proceeds from a property in your LLC

[Jeff Dimock]

I have heard many people talk about getting a larger loan than needed on an investment property – either from a private lender at purchase or perhaps from a bank refi later - then using the excess as available cash to live off of. While this is fairly simplistic and easy to understand if you own the property and the loan in a personal name, if you do so in an LLC or other entity how do you take the money out of the entity appropriately? It is not profit so it wouldn't be a distribution or other taxable income. But you shouldn't just pay personal expenses from the business account or you'll be co-mingling. So I suppose you would have to write a check to yourself from the business account. How would an accountant categorize these funds?

[Brandon Hall]

@Jeff Dimock most likely it would be a non-taxable distribution from the LLC. Debts that the LLC take on will increase stakeholder basis. A stakeholder can distribute their entire basis to themselves without incurring a tax liability.

The question that wasn't asked is: can you write the interest off on the funds that you distribute from the LLC to yourself to live? The answer is no.

Let's assume you buy a $100k property with cash inside of an LLC. Your basis is $100k. You put an additional $50k into the property which brings the ARV to $200k. Your basis is still $150k (all the cash that you have put in).

You then take a loan equal to 80% of the $200k ARV meaning that you cash out $160k. The problem is that we now have to trace where those funds are applied. If you distribute that $160k to yourself, keep them in your personal checking account and live off of them, the interest on that $160k is non-deductible. This is a huge issue with the famed BRRRRR(RR?) method that no-one seems to address.

So you have to reapply that $160k for investment property or business use in order for it to be deductible. 

But the good news is that you can distribute that $160k without causing a tax event.