FAMILY LLC

Hi guys.

I have a client that has started an LLC with his brother and sister. They are going to start managing a property owned by their mother. The house is still in the mother's name. They will collect rent and use it to pay expenses on the property for their mother (and get a very small percentage of the rent as income). They have also taken out a loan in the LLC's name, which their mother used to make some improvements on the property. Can anyone help me figure out exactly how that loan would be accounted for from the LLC's perspective? Would that just be a loan from the LLC to mother, in which case the LLC would claim interest income (and could they deduct interest on their end)? Any help would be appreciated.

What is the family's intention? Is this a loan from the LLC to the mother, as you suggested? Did the LLC obtain the loan as an agent for the mother, perhaps keeping it completely off the balance sheet, with mom making payments, although the LLC will remain legally liable? Is it the LLC's loan, with the LLC owning the improvements to the property (complicated). What you do for tax needs to reflect economic reality.

Loan to LLC. Loan to Mom.

Agree with JAD's #2.

A "loan" to a family member with no documentation and no regular payments isn't a loan.

Nonsense. If the parties considered it a loan it's a loan, regardless of a lack of documentation. Documentation is merely evidence of the parties' intent. The lack of documentation makes it easier to attack the loan as not being a loan, but by itself is not proof that there was no loan. The same goes for lack of payments.

Nonsense. If the parties considered it a loan it's a loan, regardless of a lack of documentation. Documentation is merely evidence of the parties' intent. The lack of documentation makes it easier to attack the loan as not being a loan, but by itself is not proof that there was no loan. The same goes for lack of payments.

This is where theory meets practice. All too often, I see related parties enter a "loan" with no documentation (i.e. no terms or stated interest) and no repayments. Not in the short, intermediate nor long term. No imputed interest.

And at the point that the lender deems it "uncollectible" in his mind, rarely do I see recognition of income on the lendee side due to CoDI. And gift tax returns were never filed. So we have this quasi-loan quasi-gift that wasn't reported correctly no matter what angle you view it from.

Get things ironed out now. If it's a loan, get a promissory note in place and honor the terms as if it's an arms-length note.

Thanks for the replies. Sorry I haven't gotten back on in a while. It looks like the intention of the family is to run the rental operations of this property for their mother, and then they will inherit the house eventually. The mother cannot see well anymore. It is very difficult for her to write checks. She also cannot drive to make deposits.

They are collecting rent for her in the LLC's account. They also pay the rental expenses and property tax / insurance payments from this account. Any remaining rental income will be given to her, or kept in the account to pay expected expenses.

The loan payment will also be paid from this account. The funds from the loan were used to pay off some of her debts and make repairs on the house (still in her name).

How did the LLC get this loan? (No business, no history, no collateral)
Have you seen the loan docs?

It seems a helluva lot easier to dissolve the LLC and just have the mother open a bank account with one or more children having signature authority.

It seems a helluva lot easier to dissolve the LLC and just have the mother open a bank account with one or more children having signature authority.

I know. They seemed to pick the most complicated way possible.

And it appears they used the house as collateral to acquire the loan, but the mother used the loan proceeds. I am really not sure how to do this. I don't have too many complicated returns, so any ideas and help would be appreciated. Dissolving the LLC actually sounds like a better way to go, but not sure if they'll want to do that. It would make my life alot easier.

How did the LLC get this loan? (No business, no history, no collateral)
Have you seen the loan docs?

It looks like they used the house as collateral to obtain the loan, but the house is still in the mother's name. She also used the loan proceeds for some of her debts, and some house repairs.

But the loan is in the LLC's name?

I think something is getting lost in translation. This fact pattern doesn't make a lot of sense based on what has been conveyed.

That is: The house is titled in mother's name and owned by her. The LLC obtained a loan and used the house as collateral.

Why did the bank accept as collateral an asset that isn't owned by the LLC or any of the owners of the LLC? Is mom an owner of the LLC or a party to the loan?

I think something is getting lost in translation. This fact pattern doesn't make a lot of sense based on what has been conveyed.

That is: The house is titled in mother's name and owned by her. The LLC obtained a loan and used the house as collateral.

Why did the bank accept as collateral an asset that isn't owned by the LLC or any of the owners of the LLC? Is mom an owner of the LLC or a party to the loan?

Yeah. It didn't make much since to me that way either. I talked to the client again, and got some clarification. I'm going to lay it all out again in an effort to not be so confusing (for myself too). I think I understand what they are doing from a legal prospective, but still not sure exactly how the whole thing will be handled tax-wise.

The mother owns this property (which is currently rented). She was unable to handle it herself, needed repairs done on the house, and could not get a loan on her own. The three siblings formed the LLC to get the loan and manage the property. The mother is not part of the LLC or a party to the loan. The bank allowed the loan, with the house as collateral, by means of a contract of sale that said the mother would not sell the house to anyone else, and the deed would pass to the siblings (LLC) upon her passing.

The contract also says that in the meantime, the LLC is responsible for managing the property. Any annual positive rental profit after all expenses and debt service goes to the LLC (as well as any losses). The contract also stipulates that LLC provides deed holder (the mother) with an annual statement showing all income / expenses for her tax return.

This is pretty much right out of the contract. If anyone has any input on the best way to treat this, I would greatly appreciate it. This is definitely a new one for me. If I need to I can start a new thread, as I wasn't real clear about what was going on at the start of this one. Thanks!

You've got a situation where the client created an absurd structure. If they are not going to rearrange their affairs to make this simple, then just file the 1065 based on cash flows.