Tax implications of loaning HELOC funds to LLC for investment property - best approach?

You've got the right idea, but let's simplify this a bit. When you use HELOC funds for investment purposes, the interest can be deductible - but the structure matters a lot. Creating a formal loan between you and your LLC is indeed the proper way to handle this. You'll need a written promissory note with standard loan terms (interest rate, payment schedule, etc.) that reflects what you'd see in a commercial loan. Without this documentation, the IRS could potentially disallow the LLC's interest deduction or recharacterize the payments. For the personal use portion (your weekend getaway unit), that complicates things because mixed-use properties require allocation of expenses. You'll need to track personal vs. rental use and allocate accordingly. Under the interest tracing rules, you can potentially deduct the HELOC interest on your personal return to the extent the funds were used for rental/investment purposes. However, if the LLC is paying you interest which you report as income, and then you're deducting the HELOC interest, you're essentially creating a wash (except for any difference in interest rates). The rent payments should be handled separately from the loan repayments to keep everything clean for tax purposes.

I went through a similar headache last year trying to figure out this exact situation. I found this amazing tool that saved me hours of research and probably thousands in potential tax mistakes - https://taxr.ai - it can analyze these complex investment property scenarios and provide clear guidance on how to structure everything properly. The tool helped me figure out my HELOC-to-LLC situation by analyzing the tax implications of different approaches. In my case, I needed to create proper loan documentation between myself and my LLC (just like you're describing), but the tool showed me exactly what interest rate would be considered reasonable and how to handle the mixed-use aspects. The most helpful part was that it showed me how to properly document and track everything to satisfy IRS requirements for interest tracing. It even helped generate the paperwork I needed for the loan between me and my LLC.

Just wanted to follow up - I tried taxr.ai after seeing it mentioned here and it was seriously helpful for my complex property situation. It walked me through exactly how to structure the loan from myself to my LLC and helped me understand the correct allocation between my personal use unit and the rental units. The interest tracing guidance was super clear and it explained how to properly document everything to satisfy the IRS requirements. I ended up with a solid loan agreement between myself and my LLC with the right interest rate (slightly above my HELOC rate but still reasonable). The tax saving projections were eye-opening too - I was doing several things wrong before that could have cost me thousands! Definitely worth checking out if you're dealing with this HELOC-to-LLC situation.

If you're dealing with the IRS on any of these complex property investment questions, you might want to get direct guidance from them. I was stuck in endless research loops trying to figure out a similar situation and finally decided to just call the IRS... which of course meant waiting on hold for literally 3+ hours before giving up. I found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 15 minutes instead of the usual hours-long wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with gave me really specific guidance on how to handle my HELOC-to-LLC situation, especially regarding the mixed personal/rental use allocation that was confusing me. Having an official answer directly from the IRS gave me peace of mind that I wasn't going to get in trouble for structuring things incorrectly.

I need to eat my words and apologize to the person who recommended Claimyr. I was so skeptical that I decided to try it myself just to prove it was a scam, and... I'm shocked to say it actually worked exactly as described. After struggling for weeks to get through to the IRS about my HELOC-to-LLC situation (and hanging up after being on hold for 2+ hours twice), I used Claimyr and got connected to an IRS agent in about 20 minutes. The agent walked me through exactly how to handle my mixed-use property situation and confirmed that I needed proper loan documentation between myself and my LLC. She even emailed me links to the specific IRS guidance documents for interest tracing rules that applied to my situation. This saved me hours of research and possibly an expensive mistake on my taxes. Lesson learned - sometimes solutions that sound too good to be true actually work!

As a side note on this, don't forget about the state tax implications too. Depending on your state, the LLC might need to pay an annual LLC fee or franchise tax regardless of how you structure the loan. In California for example, the minimum LLC tax is $800 annually even if your LLC doesn't make a profit. Also, some states have different rules about deducting mortgage interest than federal, so make sure you're checking both. I learned this the hard way last year when my state disallowed a deduction that was perfectly fine on my federal return.

Have you considered just skipping the LLC entirely? Unless you're concerned about liability protection, it might actually be simpler tax-wise to just own the property directly as an individual. Then you could deduct the HELOC interest directly on Schedule E for the rental portion of the property. The personal use complicates things either way, but removing the LLC from the equation eliminates the need for all the loan documentation between yourself and the LLC. Just a thought that might simplify your situation.

You're absolutely right that this feels unnecessarily complicated, but unfortunately it's the proper way to handle it for tax purposes. The formal loan agreement between you and your LLC is crucial - without it, the IRS could disallow the interest deduction entirely. One thing I'd add to the excellent advice already given: make sure you're charging your LLC a reasonable interest rate (typically prime + 1-3% is defensible) and that you're actually collecting the payments regularly. The IRS looks for substance over form, so sporadic payments or below-market rates could trigger scrutiny. For the mixed-use aspect with your weekend getaway unit, you'll need to be meticulous about tracking personal vs. rental days. The IRS has specific rules about this - if you use it personally for more than 14 days OR 10% of the rental days (whichever is greater), it becomes a mixed-use property with special allocation rules. Also consider setting up separate bank accounts for the LLC to keep all the money flows clean. Have your HELOC payments come from your personal account, LLC loan payments to you go to your personal account, and rent payments flow into the LLC account. This paper trail will be invaluable if you ever face an audit. The interest tracing rules do allow you to deduct the HELOC interest for the investment portion, but proper documentation is key for everything to work correctly.

One additional consideration that hasn't been mentioned yet: if your LLC elects to be taxed as an S-Corp down the road, this loan structure becomes even more important. S-Corps have strict rules about shareholder loans and basis calculations, so having proper documentation from the start will save you headaches later. Also, don't overlook the potential depreciation benefits. Since the LLC owns the property, it can depreciate the rental portion over 27.5 years, which can provide significant tax savings. Just make sure you're only depreciating the business-use portion of the property and not the personal-use unit. For record-keeping, I'd recommend creating a simple spreadsheet that tracks: 1) HELOC payments you make personally, 2) loan payments the LLC makes to you, 3) rental income from both units, and 4) all property-related expenses. This will make tax time much smoother and provide the documentation trail you need. The complexity is frustrating, but you're setting up a solid foundation that will serve you well as your real estate portfolio grows. Many investors wish they had started with proper structure from day one instead of having to unwind messy arrangements later.

I'm dealing with a very similar situation right now and appreciate everyone's detailed responses! One thing I want to emphasize is the importance of getting your loan documentation right from the very beginning. I made the mistake of being casual about it initially and had to redo everything when my accountant warned me it wouldn't pass IRS scrutiny. For the promissory note, make sure you include standard commercial terms: fixed payment schedule, default provisions, and acceleration clauses. The IRS wants to see that you're treating this as a legitimate business transaction, not just moving money between your pockets. Regarding the mixed-use allocation, I found it helpful to use the square footage method for expenses like insurance and property taxes, but the actual usage days method for utilities and maintenance. This gives you the most accurate picture and the best defensible position if questioned. One more tip: consider having your LLC pay the property taxes and insurance directly rather than having you pay them and then get reimbursed. This creates cleaner documentation and reduces the back-and-forth of money that could look suspicious to auditors. The whole setup is definitely more complex than just owning the property directly, but the liability protection and tax benefits make it worthwhile in the long run.