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US partnership paying mortgage on land it doesn't own.

lauriem33
Level 3

A MMLLC filing form 1065 is paying off the mortgage on land held by a foreign corporation.  Both corps have the same shareholders.  Do I deduct interest and depreciate closing cost on the US corp?  Can I enter the value of the land on the balance sheet?  I know there won't be depreciation on the land and I think I need a form 3520.  Does this sound right to everyone?  thanks

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itonewbie
Level 14

If the individuals who own both the LLC and foreign corporations are nonresident aliens, the LLC cannot elect to be an s-corp.  Since a 1065 is filed, our understanding is that it is treated as a partnership rather than c-corp, as Bill says.

Your response doesn't indicate that the foreign corp owns the US LLC (which is treated as a partnership) or the other way around, just that both entities are under common control of these nonresident aliens - if the LLC is a c-corp, the compliance and disclosure requirements would be different.

Absent any business relationship or agreement, there is no basis for the US LLC to pay the mortgage interest for which the foreign corp is liable nor should the US LLC then be able to take a deduction.  The foreign corp should have filed a W-8BEN-E or W-8ECI with the tenant.  US-ECI would also trigger a filing requirement for 1120-F.

Your question says the mortgage is on the land and you talked about depreciation not being applicable on land.  If you imply that there's rental income, it is generally subject to US tax on a gross rather than net basis unless an election is made to treat that as US-ECI.  NRA's are also subject to withholdings and FIRPTA.

You also mentioned that a F.3520 may be needed but there is no indication that a trust is involved and why you believe it is necessary.

The facts you presented are quite confusing.  You may like to review the these and the technicalities in greater details.

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Farewell AllStars, Hello Level 14! After all, what is life without numbers for a tax pro?

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TaxGuyBill
Level 11
First ... there is no US corporation.  You said it is filing a 1065, which is a Partnership, not a corporation.

Second, WHY is the US Partnership paying for something it does not own?
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lauriem33
Level 3
I have no idea.  When they set everything up, the partners set up a US LLC and another business in Costa Rica,  The Costa Rica corp closed on the land they are using the US LLC to pay the mortgage.  
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itonewbie
Level 14

If the individuals who own both the LLC and foreign corporations are nonresident aliens, the LLC cannot elect to be an s-corp.  Since a 1065 is filed, our understanding is that it is treated as a partnership rather than c-corp, as Bill says.

Your response doesn't indicate that the foreign corp owns the US LLC (which is treated as a partnership) or the other way around, just that both entities are under common control of these nonresident aliens - if the LLC is a c-corp, the compliance and disclosure requirements would be different.

Absent any business relationship or agreement, there is no basis for the US LLC to pay the mortgage interest for which the foreign corp is liable nor should the US LLC then be able to take a deduction.  The foreign corp should have filed a W-8BEN-E or W-8ECI with the tenant.  US-ECI would also trigger a filing requirement for 1120-F.

Your question says the mortgage is on the land and you talked about depreciation not being applicable on land.  If you imply that there's rental income, it is generally subject to US tax on a gross rather than net basis unless an election is made to treat that as US-ECI.  NRA's are also subject to withholdings and FIRPTA.

You also mentioned that a F.3520 may be needed but there is no indication that a trust is involved and why you believe it is necessary.

The facts you presented are quite confusing.  You may like to review the these and the technicalities in greater details.

---------------------------------------------------------------------------------
Farewell AllStars, Hello Level 14! After all, what is life without numbers for a tax pro?

View solution in original post

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