Single member LLC established as business for rental and house flipping

[oceanlovin'ea]

This is a new client. So this is information I was told.
Clients set up a single member LLC a few years ago. It was used as vehicle for flipping some houses. That didn't work too good. So they rented out the house. The rental was reported on Schedule E. But a schedule C was included with return for the operation of the LLC, which shows no income but a loss of several thousand dollars. They sold the house that was being rented in August 2013.
I am trying to work out in my head how you get to take all of this loss for having one rental house. To me this is a kind of creative tax preparation. Create an LLC, write off your office expenses (which you normally don't do with rental property) and have a big loss on your tax return. This will be the last year of the LLC.

They have another rental house but it is not part of this LLC.

They also have a Form 8829 in taxpayers name in last years return. He is employed and does security work on side "through sheriff's department". So I can't see a home office is even justified. if anything should be used for home office it seems it would be the LLC. And exclusive use is questionable to me.

Any thoughts..... I have to get this done by tomorrow. Need it for college applications.

Linda, EA

[ChEAr$]

If he's paid via a 1099-misc for miscellanous security work, there's no ordinary and necessary expenses for an office in home. he probably doesn't even make out invoices there, and is just paid hourly .
So no 8829 called for.

[Burke]

This is a new client. So this is information I was told.
Clients set up a single member LLC a few years ago. It was used as vehicle for flipping some houses. That didn't work too good. So they rented out the house. The rental was reported on Schedule E. But a schedule C was included with return for the operation of the LLC, which shows no income but a loss of several thousand dollars. They sold the house that was being rented in August 2013.
I am trying to work out in my head how you get to take all of this loss for having one rental house. To me this is a kind of creative tax preparation. Create an LLC, write off your office expenses (which you normally don't do with rental property) and have a big loss on your tax return. This will be the last year of the LLC.
They have another rental house but it is not part of this LLC.
Linda, EA

It doesn't matter if it is an LLC or if it isn't an LLC. Under the circumstances you describe..."it was a vehicle for flipping houses".....it was treated as a business if he was writing off office expenses. The other rental house (not in the LLC) would also be treated the same way if the intention was to fix up and sell. Were there significant improvements made to the LLC house?
Either way, the sale would be a 4797 issue with depreciation recapture. Only a person who qualified as a professional real estate operator would be able to do this and he would have to meet all those requirements. How did he come up with "thousands" in office deductions?. Don't let him push you for the FAFSA. He can use last year's figures on that, and correct it with 2013 later.

[oceanlovin'ea]

more information

I emailed wife and found out a little more detail. The LLC is listed as a property management company. I have had other clients who had LLC and had rental property in it. But that one was a partnership so handled differently. In the past they bought and sold some houses. They had trouble selling one and finally rented it so as to offset some of the expenses and not have it empty. It sold in August. They have one other rental that will stay a rental for a while. They may buy another rental or 2 if they find a good deal. I think the buying and selling is done. Prices are going back up and it is hard to make much money on them.

I guess what was confusing to me was that the rental has been reported on Sch E. Then on Schedule C are the expenses of the LLC with no income stated there. I have had returns with LLC's with rental property in them. But it was a partnership return. But when I think of the partnership return with rental property, the rental information was on form 8825 and the expenses of the LLC were on the first page. They were separated. So guess what he was doing was ok. Just looked strange.

Sometimes I just need to post and it helps me reason things out. your thoughts and ideas help too.

Linda, EA