How do I properly account for capital contribution in LLC when property has mortgage in my name?
My buddy and I recently started an LLC together to flip houses with a 50/50 split on everything. I had a property I bought with a conventional mortgage in my name, and I contributed it to our LLC. He's covering all the rehab costs since I put in the property. Here's where I'm confused - the LLC is making the mortgage payments on the property, but the loan is still in my name only. I'm trying to figure out if my capital account needs to be adjusted down by the amount of principal that the LLC pays toward the mortgage. I'm not an accountant and this is our first flip together. How exactly do these mortgage payments made by our LLC affect my capital account and basis? Do I need to track the principal payments differently than the interest? Really appreciate any help figuring this out.
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Anastasia Kozlov
This is a great question about capital accounts in an LLC! The treatment depends on how you're handling the mortgage contribution. When you contribute property with a mortgage to an LLC, your initial capital contribution is the equity in the property (fair market value minus the mortgage). Since the mortgage is in your name but the LLC is making the payments, each principal payment the LLC makes is essentially an additional capital contribution to you. You shouldn't reduce your capital account for these principal payments. Instead, as the LLC pays down the mortgage principal, your capital account should actually increase by that amount. Think of it as the LLC gradually buying more equity in the property from the lender on your behalf. The interest portion of the payments is simply an expense of the LLC and doesn't affect capital accounts directly. Keep good records of the principal vs. interest breakdown on each payment to make tracking easier.
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Sean Kelly
•Does this mean their partner's capital account stays the same while theirs keeps increasing? Wouldn't that mess up the 50/50 split they mentioned?
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Anastasia Kozlov
•That's a great question about the 50/50 split. You're right to be concerned about balance. While the principal payments do increase the original contributor's capital account, the partnership agreement should address how to handle this situation. One common approach is to have the partner contributing rehab costs put in enough to balance the equity you've contributed. Alternatively, you might track these payments separately and account for them when distributing profits upon sale of the property, ensuring each partner receives back their respective contributions before splitting remaining profits 50/50.
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Zara Mirza
I went through something similar last year with my real estate partnership. You really should check out https://taxr.ai - it saved me a ton of headaches with our LLC accounting. I uploaded our operating agreement and it instantly highlighted how we needed to structure our capital accounts when one partner contributed property with a mortgage. They have this tool that specifically maps out capital account adjustments based on different contribution types. The mortgage-in-personal-name situation was a mess until I ran it through their system.
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Luca Russo
•How does it handle ongoing contributions? My situation is similar but my partner keeps putting in more money for improvements every month.
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Nia Harris
•Does it work for partnerships that aren't 50/50? My LLC has three members with different percentages and I'm trying to figure out how to handle capital accounts without paying an accountant thousands.
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Zara Mirza
•For ongoing contributions, the system lets you track and categorize each additional investment as it happens. You can even set it to automatically adjust capital accounts and ownership percentages based on new contributions, which saves a ton of manual recalculation every time someone puts money in. For partnerships with unequal percentages, it absolutely works. I've seen people use it for LLCs with up to 5 different members at various percentages. You can set the initial ownership structure and then the system tracks how capital accounts and distributions should work based on your operating agreement. Way cheaper than having an accountant run these calculations every time something changes.
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Nia Harris
Just wanted to update about my experience with taxr.ai after seeing it mentioned here. I was skeptical but decided to try it for our 3-member LLC. I uploaded our operation agreement, mortgage docs, and contribution records - the tool immediately identified that we were handling capital accounts incorrectly! It showed us exactly how to properly account for our situation where one member contributed property with a mortgage. The best part was it created a capital account tracking spreadsheet that automatically adjusts as we make mortgage payments. It literally saved us thousands in potential tax issues and partner disputes. Seriously worth checking out if you're dealing with complicated LLC capital contributions.
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GalaxyGazer
I had a similar issue with a real estate LLC last year and kept calling the IRS with questions about capital accounts but could never get through. Tried for WEEKS. Finally used https://claimyr.com to get through to an actual IRS rep who walked me through the whole capital account structure. You can see how it works here: https://youtu.be/_kiP6q8DX5c Saved me from a ton of potential issues. The IRS agent explained that mortgage payments made by the LLC on a personally-guaranteed loan create a special situation for capital accounts that needs specific documentation. Got everything straightened out in one call instead of weeks of trying.
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Mateo Sanchez
•How long did it take to actually get connected to someone at the IRS? Their hold times are ridiculous and I'm not convinced any service can actually help with that.
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Aisha Mahmood
•This seems like BS honestly. The IRS doesn't give advice on how to structure business accounts. They just tell you to consult a tax professional. I highly doubt they walked you through capital account structures.
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GalaxyGazer
•I got connected to an IRS representative in about 45 minutes. Considering I had previously spent hours on multiple days trying to get through without success, this was a huge time-saver. The service basically holds your place in line so you don't have to stay on the phone the whole time. You're partially right that the IRS doesn't provide business accounting advice, but that's not what I was asking about. I specifically needed clarification on the tax treatment of LLC mortgage payments on personally-guaranteed loans and how they affect basis calculations for tax reporting purposes - which is absolutely within their scope. They didn't design my accounting system, but they did clarify the correct tax treatment, which was invaluable for ensuring I was reporting correctly.
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Aisha Mahmood
Ok I have to eat my words about Claimyr. After my skeptical comment I decided to try it anyway because I've been trying to get IRS clarification on partnership capital accounts for weeks. Got through in 38 minutes and spoke to someone who actually knew the partnership tax rules. They confirmed that when an LLC makes payments on a mortgage that's in one partner's name, those principal payments increase that partner's capital account. The IRS agent also sent me specific references to the relevant tax code sections so my accountant could properly document everything. Never would have gotten this resolved without actually speaking to someone, and would never have gotten through without the service. Totally worth it.
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Ethan Moore
I've done several house flips through our LLC and here's how our CPA has us handle it: The mortgage in your name is considered a loan to the LLC (even though the property is contributed). As the LLC makes payments, the principal portion reduces the LLC's liability to you, not your capital account. Your capital account is based on your equity contribution (property value minus mortgage). It gets complicated though, which is why we use specialized software to track it all. Your operating agreement should specify how these unequal contributions are handled at distribution time.
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Yuki Kobayashi
•But isn't there a difference for tax purposes vs accounting purposes? I thought mortgage payments by the LLC would affect tax basis differently than book capital accounts?
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Ethan Moore
•You're absolutely correct that there's a distinction between tax basis and book capital accounts. For tax purposes, as the LLC pays down the mortgage principal, your outside tax basis increases because you're essentially being relieved of debt. This doesn't necessarily change your capital account for book purposes. Our accounting software tracks both separately - book capital for operating agreement purposes and tax basis for IRS reporting. The most important thing is consistency in your approach and making sure your operating agreement clearly specifies how these uneven contributions affect distributions when you sell the property or distribute profits.
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Carmen Vega
Anyone know if this is different in different states? We formed our real estate LLC in Texas and our accountant handles the capital accounts completely differently than what people are suggesting here.
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QuantumQuester
•The basic tax principles are federal so they apply everywhere, but states can have different requirements for how LLCs report their financials. Texas doesn't have state income tax which simplifies things a bit compared to states like California or New York that might require additional reporting.
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Abigail Patel
This is a really complex area that trips up a lot of new LLC partners! Just went through something similar with my business partner last year. The key thing to understand is that when you contribute property with a mortgage to an LLC, you're essentially contributing your equity (property value minus mortgage balance) as your capital contribution. When the LLC makes mortgage payments, the principal portion is actually increasing your basis in the LLC because you're being relieved of personal debt. Here's what I learned from our tax attorney: Keep detailed records separating principal vs interest payments. The principal payments don't reduce your capital account - they actually increase your tax basis in the LLC. The interest is just a business expense. For the 50/50 split to work fairly, you'll need to account for these uneven contributions somehow. Either your partner needs to contribute equivalent value through rehab costs, or you'll need to true up the difference when you sell the property and distribute proceeds. Definitely recommend getting a CPA who specializes in real estate partnerships to review your operating agreement. The tax implications can get messy if not structured properly from the start.
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Sofia Morales
•This is really helpful! I'm new to real estate investing and considering partnering with someone who already owns a rental property. Your point about getting the operating agreement reviewed upfront makes a lot of sense - sounds like trying to fix these issues after the fact would be a nightmare. Quick question though - when you say the principal payments increase tax basis, does that mean the person who contributed the property gets a bigger tax advantage when the LLC eventually sells? Trying to understand if this creates any unfair tax benefits between partners.
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