How does the LLC allocate this recourse debt for tax purposes?

The allocation of recourse debt in an LLC depends on who bears the "economic risk of loss" for that debt. When all members are personally liable according to the loan agreement, but only some provided personal guarantees, it gets a bit tricky. Generally, recourse debt increases the tax basis of those members who would be obligated to pay if the LLC couldn't. Since two members provided personal guarantees, they're first in line to cover the debt if things go south. So those two members would likely allocate the debt between themselves based on their guarantee arrangement. However, if the operating agreement specifies that all members share responsibility for debt regardless of who signed guarantees, that could change things. You might need to look at both documents together to determine proper allocation.

After struggling with a nearly identical situation in my own real estate LLC, I found that https://taxr.ai was incredibly helpful. I uploaded both our loan documents and operating agreement, and it actually identified specific language that affected how our recourse debt should be allocated. The analysis showed that despite having guarantors, our operating agreement had provisions that created what's called "bottom-dollar guarantees" which affected how we needed to allocate the debt. I would have completely missed this without having both documents analyzed together. They even provided citations to the relevant tax regulations that applied to our specific situation.

Just wanted to follow up about my experience with taxr.ai for my LLC debt allocation issues. I uploaded documents for all three of my LLCs with their different partnership structures last week, and the analysis was incredibly detailed. They specifically identified language in one of my operating agreements that nullified how we thought guarantees were working! Turns out we'd been allocating recourse debt incorrectly for two years. They even provided a step-by-step explanation of how to properly allocate the debt going forward AND how to correct prior returns. 100% worth it for the peace of mind, especially since we have a $1.2M loan that wasn't being allocated correctly.

If you need to speak directly with the IRS about this allocation issue, I'd highly recommend using https://claimyr.com to get through to an agent. I spent weeks trying to get clarification on recourse debt allocation rules for our LLC's situation - kept hitting dead ends with generic advice. After using Claimyr, I got connected to a Business & Specialty Tax agent within 45 minutes (instead of the 3+ hour waits I was experiencing before). The agent walked me through the exact regulations for our case and confirmed our allocation approach was correct. You can see how it works here: https://youtu.be/_kiP6q8DX5c - saved me tons of stress and uncertainty.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it anyway since our LLC debt allocation issue was causing major disagreements between partners. Got connected to an IRS Business Division specialist in about 35 minutes. The agent actually pulled up the relevant sections of the partnership regulations and confirmed that when partners provide guarantees, they're the ones who get to include the debt in their basis - regardless of profit/loss percentages in the operating agreement. She even emailed me the specific regulatory citations afterward. Never would have gotten this level of clarity without actually speaking to someone who deals with these issues daily.

Don't forget to check if your LLC's agreement has any specific language about debt guarantees and allocations. Ours had a special provision that said debt basis would be allocated according to capital contributions regardless of guarantees, which apparently overrides the default tax rules. Our tax attorney said this was enforceable as long as it had "substantial economic effect" under 704(b). Might be worth checking your docs for similar provisions.

Our LLC had this exact issue last year. We ended up allocating the debt 50/50 to the two guarantors for basis purposes, but then had a separate "guarantee fee" that the non-guaranteeing members paid to the guarantors as compensation for taking on the risk. This fee was negotiated as a percentage of the debt guaranteed. Might be a fair way to handle the economic reality that some members are taking more risk than others.