Confused About Taxes On Credit Line
If I write a $5000 check from my credit line for some repair. The repair is an expense. But then later when I write a $5000 check to pay back the credit line - what is that?
How is this different than getting a mortgage from a bank and making mortgage payments?
It is late and I am getting confused.
Brenda
Quote:If I write a $5000 check from my credit line for some repair. The repair is an expense. But then later when I write a $5000 check to pay back the credit line - what is that? Repayment of a loan. You borrowed money from your credit line to pay for repairs. When you payoff your credit line, you are just repaying your loan.
Quote:How is this different than getting a mortgage from a bank and making mortgage payments?There is no difference.
So is any part of my monthly mortgage payment a taxable event?
I have my properties in my personal name. Use my Home Equity Line to fund the real estate. Is the only taxable event on my home equity line the deduction of the interest?
Brenda
The accoutning treatment of the first transaction is that you Debit your Repairs expense account for $5000. The other side of the transaction is a credit to your Line of Credit Liability account for $5000.
Then, when you pay off the Line of Credit you'll Credit your Cash Account for $5000 and you'll Debit your Line of Credit Liability account for $5000.
The net affect is that you have less money in your checking account and your expense account reflects the $5000 repair bill.
Both the Line of Credit and a mortgage would be Liability accounts. They are both treated the same.
Here are a couple of things that jump out at me that you may want to be concerned about.
Are you incurring any interest expense? If so, then you'll want to make sure that you Debit your Interest Expense account for the amount of money that is going towards interest. You didn't specify that there was any interest involved but I'm sure you're getting charged it somewhere.
So, let's say your repair bill was actually $4900 and the Line of Credit balance was $5000 when you paid it off b/c it included $100 in interest expense. Then, the entry is a little different. The first entry would be a $4900 Debit to the repair Expense account and a $4900 Credit to the Line of Credit account. Then, when you write a check for $5000, you'll debit the LoC account for $4900 and debit your Interest Expense account for $100 and, same as before, you'll Credit cash for $5000.
Also, I wonder about how you've got these different accounts and properties titled. The way you're doing things, it simply sounds like you're operating as a sole proprietor with no separation of personal accounts from your RE business. If the Line of Credit is in your own name but you own the property and are conducting business in an LLC, for example, then you may have a comingling of funds issue which could come back to haunt you.
If this is the case, you might consider loaning the funds from yourself personally to your entity. I'm not certain as I'm not an atty so I don't have the answer to this.
How do other people handle this? i.e. when you're using personal loans/lines to fund your RE business that is being done in a separate legal entity from yourself personally? Should you loan it to your business??