Discussion:Mortgage interest and self charged interest
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Discussion Forum Index --> Advanced Tax Questions --> Mortgage interest and self charged interest
Discussion Forum Index --> Tax Questions --> Mortgage interest and self charged interest
THECPAATHOME (talk|edits) said: | 13 September 2008 |
| I just want to make sure I'm not missing something. S-Corp shareholder (he and wife are only s/h) financed a new business with a home equity line of credit. I originally had the HELOC as a liability on the s-corp books, and was electing Reg 1.163-8T. However, he had losses in excess of basis and a colleague suggested instead structuring this as a loan from shareholder on the s-corp books (since the corp is not obligated to pay the debt)in order to get him basis, showing interest paid to the shareholder. I was researching the self charged interest rules and now I'm confused.
1. If it is shown as a loan from shareholder on s corp books, does that screw up the 1.163-08T election in any way, since now he’s taking the mortgage interest on sched A (it’s well over $100,000) 2. Self charged interest - if the proceeds are used in an active business, is the interest exp/income still considered passive, unless the paragraph g election is made? Thanks | |
Death&Taxes (talk|edits) said: | 13 September 2008 |
| Is there confusion here between Reg. 1.163-8T and Reg. 1.163-10T, especially (o)(5) of the latter? I do not recall any election to be made under the former, but rather that it governs allocation under the interest tracing rules. Under the later regulation, an election is made to treat the debt as not secured by the residence, and while it might be only a matter of semantics to some, the latter regulation reads:
"An election made under this paragraph shall be effective for the taxable year for which the election is made and for all subsequent taxable years unless revoked with the consent of the Commissioner." If this election were made, rather than the allocation in 163-8T, then you cannot switch the application of the loan except by getting permission from the Commissioner. | |
THECPAATHOME (talk|edits) said: | 13 September 2008 |
| Yes, I was mistaken - the election is under 1.163-10T. The return hasn't been filed yet, so I am working through how to structure this - if the corp takes the interest on corporate return from the HELOC, then there are basis issues - but if it's structured as a loan from shareholder, he can take his losses. But that leaves me with two questions - can he still make the 1.163-10T election so that the $100,000 home mortgage limit doesn't apply, and the question about the self charged interest treatment on the personal return comes in - is it still passive even though this is an active trade or business? Do I have to make the election under paragraph g of sec 1.469-7? | |
Death&Taxes (talk|edits) said: | 13 September 2008 |
| To my mind, the original entry on the S books had to be in error since the corporation had no liability to repay the HELOC, and therefore it had to be a shareholder loan. Assuming the loan was used to acquire the S Corp stock, if the interest was paid by the individual it would be deducted on Sch E. In this case the S Corp made the payment, and in theory we should have a wash. The interest payment increases the S loss or decreases the profit while the income is reflected on Sch B.
My understanding of 1.469-7 is that it applies to prevent the recipient having to reflect interest income while not being able to deduct a passive loss, and passive activity is required. I don't see how that would apply here in the case of an active business. But what happens if corporation pays 10K interest on his HELOC and this expense is part of a loss suspended because of lack of basis? Not sure this could easily happen, but..... | |
| 13 September 2008 | |
| The interest on the HELOC would be deducted on page 2 of Schedule E. | |
THECPAATHOME (talk|edits) said: | 13 September 2008 |
| The proceeds were not used to buy an interest in the s-corp. The s-corp already existed, and the shareholder used the proceeds from the HELOC to buy the assets of a car wash in the corporations name.
I'm still feeling confused - please bear with me. So on the s-corps books, there would be a loan from shareholder, interest expense on that loan from shareholder; on the individual return, the interest expense to shareholder paid by the corp flows through on sched e and the individual shows income from the shareholder loan. That's a wash. He's not getting a benefit for the mortgage interest since he's picking up the income. Does he then take the mortgage interest on sched A? and if he does, is he limited to the $100,000 or can he still elect 1.163-10T? | |
| 13 September 2008 | |
| The interest on the HELOC would be deducted on page 2 of Schedule E if the client treats the amounts borrowed as a capital contribution and he materially participates in the activities of the car wash. No, this doesn't necessarily mean that he is wiping down cars. | |
| 13 September 2008 | |
| If the taxpayer elects to treat the amounts advanced to the corporation as a loan, the interest on the HELOC will be investment interest expense (not recommended). | |
