Which line on 1065 Sch K-2 to report mortgage interest expenses?

[hgtc]

A domestic LLC (leasing company) that has no foreign source incomes/expenses paid or taxes.  Their only incomes are from rental activities.  Have mortgage interests and other expenses on form 8825.   Where do I report mortgage interests paid to US Bank on Sch K-2, part II, sec 2-Deductions?

Should I report it under line #40 – other interest expenses under Reg 1.861-10T?

Or, should I include in Line #34 – allocable rental expenses other than depreciation…?

[sjrcpa]

Not 39?

I'm working on trying to figure this out myself.

[hgtc]

Sorry, I do not understand the differences between Ln#39 - Reg1.861-10(e) and Ln#40 - Reg1.861-10(T).

Does anyone have idea which Reg does mortgage interest expenses belong to?

[TaxMom12]

Did anyone ever find an answer to this question? I've read each Reg and can't decipher which is applicable interest field.

[joshuabarksatlcs]

RE:   Sorry, I do not understand the differences between Ln#39 - Reg1.861-10(e) and Ln#40 - Reg1.861-10(T).  Does anyone have idea which Reg does mortgage interest expenses belong to?

**************************

Line 40.

First, is your interest deduction subject to Reg. 1.861-9T, Allocation and apportionment of interest expense?  Bear in mind Section 861 deals with "Income from Sources within U.S." 

If YES, does it fall under the three exceptions under Reg 1.861-10T?

(a) In general. This section applies to all taxpayers and provides three exceptions to the rules of § 1.861-9T
(b) Qualified nonrecourse indebtedness -
(c) Direct allocations in the case of certain integrated financial transactions -
(d) Special rules. In applying paragraphs (b) and (c) of this section, the following special rules shall apply.

Thus, if your reporting is subject to 1.861-9T AND also one of the three exceptions applied, report on

Line 39.

If your reporting is specifically subject to the allocation rule under 1.861-10(e), report on LINE 39

What is 1.861-10(e)??  Here it is:

§ 1.861-10 Special allocations of interest expense.
Link to an amendment published at 87 FR 326, Jan. 4, 2022.
(a)-(d) [Reserved]

(e) Treatment of certain related group indebtedness -

(1) In general. If, for any taxable year beginning after December 31, 1991, a U.S. shareholder (as defined in paragraph (e)(5)(i) of this section) has both -

(i) Excess related group indebtedness (as determined under Step One in paragraph (e)(2) of this section) and

(ii) Excess U.S. shareholder indebtedness (as determined under Step Two in paragraph (e)(3) of this section),

the U.S. shareholder shall allocate.....

The (i) and (ii) above are specifically defined thingies that, if you're subject to Sec 1.861 in general, you should read the detailed definitions.  (zzzzzzzz)

Others - Line 34

If you're NOT eligible for the 1.861-10T exception, and NOT subject to 1.861-10(e), and you're subject to the 1.861 allocation, Line 34.

If you're NOT subject to Reg 1.861-1 et al., and NOT required to file K-2/K-2, why would you care?

Here's from the Form 1065 Schedule K-2/K-3 filing instructions.  Emphasis added:

Who Must File

The partnership need not complete this schedule if the partnership does not have items of international tax relevance (typically, international activities or foreign partners). Any partnership required to file Form 1065 and that has items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners under the international provisions of the Internal Revenue Code must complete the relevant parts of Schedules K-2 and K-3. See each part and section for a more detailed description of who must file each part and section. Penalties may apply for filing Form 1065 without all required information or for furnishing Schedules K-3 to partners without all required information. The penalties that apply with respect to Form 1065 and Schedule K-1 apply with respect to Schedules K-2 and K-3, respectively. See Penalties in the Instructions for Form 1065.

Note. Except as otherwise required by statute, regulations, or other IRS guidance, a partnership is not required to obtain information from its direct or indirect partners to determine if it needs to
file each of these parts.

Note. A partnership is only required to complete the relevant portions of Schedules K-2 and K-3, as applicable. For example, if the partnership does not own (within the meaning of section 958) stock of a foreign corporation other than solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b), it is not required to complete Schedules K-2 and K-3, Parts V, VI, VII, and VIII.

[joshuabarksatlcs]

The following is from another K2/K3 thread.  Put here for "discussion relevance".

8m ago
RE: For example, if the partner claims a credit for foreign taxes paid by the partner, the partner may need certain information from the partnership to complete Form 1116.

Very True. I have no doubt down the road, more examples or other authoritative thingies will come out to draw the line for the term "international tax relevance", as in "The partnership need not complete this schedule if the partnership does not have items of international tax relevance"

PhoebeRoberts
Level 10 PhoebeRoberts
Level 10
2 hours ago

https://www.irs.gov/forms-pubs/changes-to-the-2021-partnership-instructions-for-schedules-k-2-and-k-...

The following changes are applicable for the 2021 Partnership Instructions for Schedules K-2 and K-3 (Form 1065) PDF:

The following note is added as the last paragraph in the section entitled "Who Must File" on page 2:

Note. A partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3. For example, if the partner claims a credit for foreign taxes paid by the partner, the partner may need certain information from the partnership to complete Form 1116.

[hgtc]

Thank you for the information.  Tried to read reg 1.861-9T, 1.861-10T, and 10(e)... But, still do not fully understand them.

Can you help to see which Line (on Sch K-2) I should use to report mortgage interests paid (to an U.S. Bank) by this domestic LLC, whose only source incomes/expenses are domestic residential rentals?

LLC has no foreign incomes/taxes/expenses, directly or indirectly.  But, one partner has foreign investment incomes & foreign tax credit in his form 1040.

Again, thanks.

[sjrcpa]

Most real estate mortgage interest is qualified nonrecourse mortgage interest.

[hgtc]

Yes, it is a qualified nonrecourse loan for this LLC.  But, is this type of mortgage interest expenses subject to Reg 1.861 allocation?  (hence, report on line #40?)

[Yel]

Did you ever find out?  I have exact same issue

[hgtc]

not yet.  Still waiting for answer(s).