Is it dangerous to mix business-personal finances with LLC ?

Question

I recently refinanced the mortgage on my primary residence and combined the loans I took out to purchase my investment properties.  I have three single family, long term rentals with separate LLC's and business accounts for each property.  I am planning to make the mortgage payments from a combination of the business accounts and my personal account.  Now that I am mixing finances, am I negating the protections provided from the LLC and opening my personal assets up to a potential lawsuit ? Does it make any difference if two of the properties and a portion of the third were purchased by taking a HELOC from my primary residence ?

Account Closed · Answer

Negating protections, Probably. It's called "co-mingling of funds". It also could affect taxes depending on the type of LLC and the tax election. Will it be a problem for providing "protection", not likely. Are you planning on being sued for some reason? Will it be a problem for tax purposes, I'm not sure. It depends on a variety of things and a CPA or EA can answer that for you.

Michael Plaks · Answer

@Kenneth Burke

You're not giving enough details, leaving room for assumptions.

Here're my assumptions. You needed to buy 3 properties for $100k each. You borrowed $250k on your HELOC, enough for 2.5 properties. 40% of the interest on the HELOC is deductible against property A, ditto for property B, and 20% is deductible against property C.

Now these 3 properties are moved into 3 separate LLCs. The wisdom of this step is up to attorneys, and I'm not one. An attorney should advise you on how much this protects your personal assets and what hoops you must be jumping thru.

The LLCs should have documented the fact that they assumed responsibility for their respective portions of the HELOC loan. The payments should have come from the respective LLCs' bank accounts in the 40/40/20 proportion. As long as this is how you run it, it should not create a legal problem, I hope, but this is also an attorney's question. Making HELOC payments from your personal funds might be a problem.

Now you refinanced your house and replaced your HELOC loan with the mortgage proceeds. Let's say you refinanced it for $500k, $250k of which was your old mortgage and the other $250k replaced HELOC. Your tax deductions are now 20%/20%/10% of the new mortgage interest, and these percentages is how the payments should be made from the LLCs accounts. No tax issues. I doubt that this would create additional legal complications, but I cannot have a valid opinion on legal matters, not being an attorney. The LLCs should have documented their consent to you replacing one loan with another.

Various complications are possible, depending on the details of your setup. Do talk to an attorney.