Real property in an LLC

[Burke]

The sale of rental real estate is a 4797 fully deductible loss and not subject to the $3K cap. IMO, the fact that it was in an LLC (not taxed as a corporation) does not alter this fact. So the only thing that is now coming in is interest on the sale and would be reported each year on Sche B on their joint return. Why would he feel the LLC must be kept open? Do they intend to purchase more rental property in the future?

[ttbtaxes]

I see no reason why the losses do not flow through in the year of sale. Take a look at the May 2008 edition of the Tax Advisor and read the article. Disposing of an Activity to Release Suspended Passive Losses.

[kathyc2]

Kathy, I'm usually not as knowledgeable as you, .

Haha! This is what I'm getting as I input it in the software. I was hoping that someone who had this situation before could verify that software is handling it correctly and save me some research time... Looking for an easy way to eliminate some of the backlog piles on my desk.

[Snaggletooth]

Don't think so

Kathy, I'm usually not as knowledgeable as you, but I don't know why a loss can't be fully reported in 2016 and subject to the $3,000 cap for each "partner." The $3000 cap applies to the individual returns and does not limit the loss reported on the K-1. The loss was incurred by the LLC, and I don't know why taking the loss has to be postponed until the LLC closes. Is there a cite for this? I don't how there could be since the IRS does not even recognize an LLC.

The LLC survives as a partnership, reporting only interest for 10 years.

Based on my knowledge and experience, this is how I would treat it. But I've been wrong before. Maybe others will post.

[kathyc2]

Sorry, I didn't say that the LLC is taxed as a partnership. All that remains on the company books at the end of 2016 is a little cash, land contract receivable and off-setting equity. It's not a 6252 transaction.

This is a new one for me, but I'm finding that if it was on a Sch E, then the sale of buildings would be a capital loss subject to the 3K annual max.

However, since it's an 1065 LLC the loss on sale is subject to passive loss rules until such time as the LLC closes. After that time the loss is fully deductible and not subject to 3K capital loss.

Am I missing something?

[Snaggletooth]

Loss has occurred

Kathy help me with this as I ramble, and correct the facts if necessary.

"Passive" treatment is totally consummated if property is sold. As in "over", "past tense", "gone" or any other idiom, right? Losses suspended by passive activity rules are disgorged with the sale, and whatever basis has been accumulated has now become a legitimate deductible loss at the point of sale in 2016.

There is the option of installment sale election, but I've never heard of it being used to drag out a loss. I believe the loss occurs in 2016 in its totality.

If the advice is taken to keep the LLC open for the duration of the payment, I believe the only relevant item from this discussion would be the interest income. If the LLC is operating as a C corp, there may be a danger of personal service corporation, although I can't imagine application of a PSC for a small amount as this. With no other activity going on, if this is going to drag on for 10 years, I might consider converting to an S corp to avoid double taxation.

If you convert, you may sequester the current earnings from dividend treatment until invaded upon dissolution.

[kathyc2]

Husband/wife held 2 properties in an LLC. Both were sold in 2016 at a loss. One was an outright sale and the other on a land contract. Their attorney prefers to keep the LLC open until the land contract is paid off (10 years). Their 2016 income before the loss is close to the 150K mark. Am I correct that as long as the LLC is still active, their deductible loss on it is limited as passive, but if we close the LLC they can claim the entire loss in the year of closure?