ST or LT Capital Gain?

Technical topics regarding tax preparation.
#1
CathysTaxes  
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Realtor talked client into putting her condo into a LLC (with him of course) on June 2022. She quit claim deeded the condo and he paid off the mortgage. It was sold in Sept 2022. The 1065 is showing the original purchase date of 1/28/2016 making it a long term capital gain. I believe it should be short term using the June 2022 (quit claim deed) date.

Am I correct or the 1065 tax preparer?
Cathy
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#2
Nilodop  
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You referred to form 1065, so there must be a partnership and an agreement. And the property was sold pretty fast, making me wonder if the realtor had a deal in his back pocket, creating a step-transaction issue, or an assignment-of-income issue. And did the property cease to be a capital or 1231 asset and become one held for sale to customers in the ordinary course of business?

But if we get past that, holding period generally carries over in formation of a partnership, applying sections 1223(1) and 721. However, there are disguised-sale rules in sec 707 and reg. 1.707-3 that could mess up the result here. For your client, maybe all it does is move the sale date to June but for the realtor, seems his holding period of the partnership interest starts in June and ends in Sept. There's stuff in the reg. that creates assunptions and disclosure rules, too. Maybe the condo holding period inside the partnership gets split. I don't know.

We need an expert for how this all works.
 

#3
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LT
Holding period carries over to partnership on contribution.
That's the answer for her.
I'd have to double check on gain allocated to him.
~Captcook
 

#4
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Thanks. This whole business seems fishy. LLC did not file extension because the tax matters partner told my client that he didn't had to file a return. Then after I sent her multiple emails proving him wrong, then he finally gets an accountant. Then all pdfs she got from him she asks me to send her so she can send them to him. Then the real doozy. She didn't have her original purchase documents so I obtained purchase price and purchase date from Zillow to put in my emails. She actually asked me when she purchased her condo!

Now for the 1065. The k1 has two amounts, LT capital gain and amount distributed. The 1065 does not list any expenses, ie, LLC incorporation. The return is marked Final. What about 2023 expenses such as termination of LLC, accounting fees, tax prep, and replacement tax for Illinois. No mention on who is going to pay the two plus months of late filing and late payment fees.

And the almost $16,000 capital gain is costing her and her husband almost $3300 extra income tax instead of being excluded because it was her primary residence.

The sale time included remodeling time as well. Plus he still gets his commission.
Last edited by CathysTaxes on 31-May-2023 11:56am, edited 1 time in total.
Cathy
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#5
Nilodop  
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Smacks Reeks of fraud.
 

#6
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Nilodop wrote:Smacks Reeks of fraud.


I agree. I think the realtor is a friend of hers so I'm careful what I am saying. I want a detailed list of the expenses related to basis. I also want to make sure this guy doesn't try to stick her with the late filing penalties because it's his fault!
Cathy
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#7
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This is a draft of an email I intend to send. Any thoughts?

A couple of questions and comments. First, I cannot contact LLC tax preparer without a valid Section 7216 disclosure.

1) You have a taxable gain of $15,906 because of this venture. Without this venture, this gain would have been excluded because taxpayers have a section 121 exclusion of $250,000 for gain on the sale of their primary residence (single taxpayers, $500,000 for married). Your returns would have had a federal refund of $265 and an Illinois refund of $124. Now you owe federal $2199 and Illinois $663, so this venture is costing you additional federal tax of $265 federal refund plus $2199 = $2464 and Illinois of $124 refund plus $663 owed = $787 for a total additional tax of $3251!

2) The condo has a basis reduction of $25,377. I would like to see the detail. They should have provided you with a detailed general ledger.

3) The return is marked as FINAL, yet there are 2023 expenses related to this venture, such as, the Secretary of State Fee to terminate the LLC, the accounting fees, the tax return prep fee, and the Illinois Replacement Tax. These would be expenses on a 2023 return. Who is paying for these expenses.

4) The last concern I have is the late filing penalty for both Federal and Illinois and late paying penalty for Illinois. The returns were due March 15th and no extensions were filed. Federal charges $220 per month, per member, so that comes to $440 a month. The LLC is 2.5 months late. The penalties are not tax deductible. Will LLC tax preparer be handling a penalty abatement request or who is going to pay this?
Cathy
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#8
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What's on the realtor's K-1?

Federal FTF penalty can most likely be abated with a FTA or the small pship abatement (assuming everyone reports their K-1 income on their timely filed returns). Not sure about IL.
 

#9
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ManVsTax wrote:What's on the realtor's K-1?

Federal FTF penalty can most likely be abated with a FTA or the small pship abatement (assuming everyone reports their K-1 income on their timely filed returns). Not sure about IL.


The realtor's K-1 is only off by a couple of dollars as he's 51% and she's 49%.
Cathy
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I would think the initial built-in gain would have been allocated to your client and distributions would follow ending capital accounts. Other posters have already alluded to that.

Who paid for all of the remodeling?
 

#11
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ManVsTax wrote:I would think the initial built-in gain would have been allocated to your client and distributions would follow ending capital accounts. Other posters have already alluded to that.

Who paid for all of the remodeling?

There's a reduction of basis (no detail) of about $25,000. Supposedly he was supposed to pay off the loan and remodeling. The condo sold for $141,000. Sounds to be like the proceeds from the sale paid for most of that.

And it's hard to tell anything. The 1065 has a sale of asset, the partners share of the gain and distribution.
Cathy
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#12
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Hmm... Who pays off a mortgage on a property that's going to be sold in a couple months? If you have the cash to pay it off, just float two or three more monthly payments. Putting aside the concern that your client was taken advantage of and conned out of half her equity, what's stopping you from using the Sec 121 exclusion on her passthrough LTCG?

Aren't the general requirements that she owned and used the property as a principal residence during 2 out of the last 5 years.
 

#13
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CathysTaxes wrote:...
And the almost $16,000 capital gain is costing her and her husband almost $3300 extra income tax instead of being excluded because it was her primary residence.
...


I believe this is incorrect. See if this analysis of Letter Ruling 200004022 helps: https://www.thefreelibrary.com/Partners ... a062725157
 

#14
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ManVsTax wrote:Hmm... Who pays off a mortgage on a property that's going to be sold in a couple months? If you have the cash to pay it off, just float two or three more monthly payments. Putting aside the concern that your client was taken advantage of and conned out of half her equity, what's stopping you from using the Sec 121 exclusion on her passthrough LTCG?

Aren't the general requirements that she owned and used the property as a principal residence during 2 out of the last 5 years.

She meets the requirements. How can I use the exclusion from the LLC? This is new to me and would be great.
Cathy
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#15
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KoiCPA wrote:
CathysTaxes wrote:...
And the almost $16,000 capital gain is costing her and her husband almost $3300 extra income tax instead of being excluded because it was her primary residence.
...


I believe this is incorrect. See if this analysis of Letter Ruling 200004022 helps: https://www.thefreelibrary.com/Partners ... a062725157

Thanks I will look at this!
Cathy
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CathysTaxes wrote:She meets the requirements. How can I use the exclusion from the LLC? This is new to me and would be great.


I would need to look at it more, but it appears she qualifies for the exclusion based on the facts.
 

#17
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ManVsTax wrote:
CathysTaxes wrote:She meets the requirements. How can I use the exclusion from the LLC? This is new to me and would be great.


I would need to look at it more, but it appears she qualifies for the exclusion based on the facts.

She lived there since 2016, got married July 2021, they lived there while hubby's condo was remodeled, then moved to his and then got talked into this business venture.

So unless Drake has an option to treat the llc as section 121, I can probably manually offset the amounts and enter it as a sale of residence.

Thanks everyone, this is great news.
Cathy
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#18
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Yeah, quite frankly, I think the IRS would have a big problem with client excluding gain.

In the ruling, the property was distributed out (to the individuals) prior to the sale. The author is very well known and respected. However, his conclusion in the first paragraph of, “…should also apply to a residence titled in the partnership at the time of the sale” can be taken, IMO, to only be applicable to the facts in the ruling. He makes the same claim in the final paragraph. I think his point is that if the “partnership” is just a title-holding entity, wherein property is used personally [and exclusively] inside the partnership, then perhaps an exclusion could be sought on the grounds that the partnership really isn’t conducting business or holding property for investment, but rather, is just a title holder. But even with that said, the couple in the PLR apparently dropped a bunch of rental properties into the partnership as well. That to me might mean that the partnership was more than a property title holder. However, the ruling seemed to focus on the residence only. Why? I do not know. In any case, I do understand the line of reasoning that a title-holding partnership might not be a partnership for income tax purposes. Just maybe. I’m a bit uneasy about it. But it sure seems like it may have been a real partnership in the PLR situation.

Now we get to OP’s case, where the facts are markedly different than the PLR. Cathy posted about this situation previously. And if I’m not mistaken, there was some property fix-up involved:

viewtopic.php?f=8&t=28363&p=237080&hilit=realtor+llc#p237080

I’m not sure if the fix-up happened. But Cathy does say the realtor paid off the mortgage. Said partnership amounts to more than a title-holding entity, IMO. It really existed to split profits. And it doesn’t just involve two spouses.

In short, I think Cathy would have a problem if an exclusion was claimed and it got challenged. Also some food for thought: If the realtor really did expend funds to fix-up, perhaps Cathy’s client got more (money) that she otherwise would have. I do realize that two spouses could do the same thing: Drop a residence into a partnership, fix it up through the partnership, and then sell it. In that case, though, I can still see how the primary purpose of the partnership was title-holding.

With all that said, I feel pretty uncomfortable with the PLR in question. Seems the IRS did too, hence it being revoked with PLR 200119014. (I haven’t thought through the fact that we’re dealing with an LLC here, but I’m not so sure I need to).
Thanks everyone, this is great news.

No, it’s not. Your facts don’t align with the PLR in the first place. And the PLR was revoked in the second place.
 

#19
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Thanks Jeff. A gal can hope. Oh well.
Cathy
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#20
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Jeff-Ohio, thanks for your detailed response. This is actually going to be (un)helpful to one of my clients, too, I think. I'll have to review it more when I have time.

My client started off with a partnership to flip properties, but then decided to sell off the land part undeveloped and live in the other half. Since he keeps changing his mind about where he lives, and what's an investment, I don't even know what the facts will be when (if) it finally sells. I'm actually **this close** to firing him because of his total inability to separate his various activities in his bookkeeping.
 


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