@Alex Morrison I am in a similar situation as you are. My husband and I created an LLC to buy a rental property. We are using a combination of our savings and a HELOC drawn from our primary residence. When we set up the LLC, we wrote the Operating Agreement specifying the capital contribution amount -- $500k total, $250k from each person. Then we transferred $200k of our savings to the LLC's checking account, plus $300k of the HELOC money. On paper, we recorded it as capital contribution of $500k from the two members. (As far as LLC is concerned, it doesn't care where the money comes from. I had thought about contributing $200k capital and making the LLC taking a $300k loan from us, but based on my research, that will actually be a much more complicated transaction in terms of paperwork and tax filing. So we decided to keep it simple and make every $ we put in a capital contribution.)
Now the LLC has $500k capital, and that money is used to buy a property, pay for expenses and etc. This is where we are at right now -- bought the property, no income yet. So everything I said so far was facts, and everything I will say below is my projection.
When the property starts to generate income, we can take the money out as distribution or leave it in the LLC's checking account. We have to keep an Excel file to track our Capital basis. Let's say the first year it collects $50k rent, minus $25k expenses, and another $15k capital depreciation. So the net income is $10k, which means each of the members' capital basis increases by $5k -- now we each have $255k capital. We can withdraw up to $25k (that's the net cash flow, because the $15k depreciation is only on paper). If we do that, each of our capital basis is now down to $242.5k. The $25k can be spent by us in any way we want, but hopefully to pay down the HELOC. The $10k from the LLC will be on the 1040 tax return via two K-1s, one for me and one for my husband. Whether we take the money out or leave the money in, whether we take out $25k or $10k or $1k, it has no impact to our tax, because LLC is a pass-through entity. The only impact is our capital basis in the LLC.
And based on my research, the interest payment on the HELOC is still tax deductible. I know IRS tightened the law on deducting HELOC interest payment in recent years, but I believe if we make it very clear through record keeping that the entire HELOC money is spent on buying a property, it's still deductible. Look up "Interest Tracing" as a tax topic.
I am a housewife and certainly has no formal education in tax or accounting. What I said above was based on my research online. I would appreciate you or anybody else on BP to critique. If my understanding is wrong in any area, the sooner I know about it the better it is. :-)
