469 grouping decision

Technical topics regarding tax preparation.
#1
golfinz  
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Husband and Wife own an RV Park/Campsite LLC (partnership) and own a Rental LLC (partnership). They bought the park in 2017. Their attorney wanted the land and building separate from the operations of the camp, so the Rental LLC bought the land/buildings and subsequently rents them to the Operating LLC.

I’m sure you know where this is going. The RV Park LLC has income (150k in 2018) but the Rental LLC has a loss (60k in 2018). This rental loss is being trapped because of the PAL rules. H&W have no other sources of passive income. I ran out their loan amortization schedule along with anticipated depreciation/amortization and they won’t show a profit for the next 10 years. FMV rent is being charged.

I’ve read 469-4 and it appears that we can make a grouping election to treat them as an economic unit because the ownership is the same in both entities. While I cannot find any reasons not to make the election, I’m unclear on two things:

1) If we group in 2018 (would make the election on their 1040), would the now non-passive loss from the Rental LLC reduce Self-Employment income? I’m thinking that it would but a part of me thinks that rental income, even non-passive, is rarely subject to SE tax. The reason I think it would reduce SE income is because if all activity was in one entity, SE income would be reduced.

2) We filed an S Election for the Operating LLC beginning 1/1/2019. If we group in 2018, would it be impacted by this election?

3) added: Can we make this election in 2018 or should it have been made in 2016 (or 2017) when the activities were first placed in 'service.'

Anything else that I'm not considering? The 2017 suspended PAL will be 'trapped' but seems better to group now and limit those trapped losses.
Last edited by golfinz on 10-Oct-2019 9:27am, edited 1 time in total.
 

#2
golfinz  
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Any thoughts? Question added.
 

#3
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Sure.

#1 – The election is for Sec 469 purposes only. It does not impact anything related to SE earnings or loss.

#2 – No. Sec 469 deals with activities, not entities.

Dig into the “trapped” comment a bit further. You might be right, but confirm it. What we have is an isolated activity (the rental) that was passive in 2017, with a passive loss carrying into 2018. In 2018, that activity will be part of a grouped activity that will reflect a non-passive profit. Would the “former passive activity” rules kick in to any extent, would be my question?
 

#4
golfinz  
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Thanks Jeff, all make sense. Will check into the 'trapped' comment. Without the election, I know we can offset profit from a self-rental activity with any prior year suspended losses from that same activity (just not other passive activities).

Another consideration is to increase rents so that Rental LLC shows a profit, which would then get offset by the prior year suspended losses.
 


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