Taxes on Vacant Land - Partnership

[Burke]

I know property taxes on vacant land are deductible for individuals, but most people can't itemize now so that deduction is "lost." What about a partnership? I recently saw one where there is only vacant land owned by a partnership, and they were deducting the taxes (the only expense) as an ordinary loss, which was passed thru on the K-1's. There is no income generated by the land. It's for sale but the partnership has owned it for 10+ years.

[dmj4]

I have an LLC that the property taxes come through on the Partnership K-1's. I don't do that partnership return, but the taxes are shown as Ordinary Loss, Line 1 on the K-1's. It is a farm, but the Partnership only contains the land and pays the taxes.

[Burke]

And there is no income from the farm? This entity is also an LLC. . If taxes were to be capitalized, they would be deducted at the time of sale, but this way it is a current deduction which passes through to the partners. So they are receiving the deduction from their gross income even though they do not file Sche A. Individually-owned vacant land taxes would be lost unless capitalized. Somehow this seems like a loophole. Just wanted to check around to see if it was a legitimate treatment. Can't find any info that says it isn't. The partnership is not husband and wife, but what if it were? Seems like passive loss rules should come into play. But on the other hand, since it was originally land bought for resale purposes and subdivided, any sale would result in an ordinary income/loss treatment, not capital gain.

[TaxGuyBill]

Where is the deduction on the Partnership return?

It if is not available for rent, it wouldn't be on the 8825. But it doesn't really seem like a "business" expense that should be on page 1 of the 1065.

[Burke]

I found the answer. It is not deductible as an ordinary loss, and I believe this would apply to the LLC mentioned by dmj4 as well. It is supposed to be shown as a deduction on Schedule K, Line 13 Other Deductions, and passes through to Box 13, Code W on the K-1. Therefore, it would be treated the same as expenses held for "management,...or maintenance of property held to produce income" by the individual partner and subject to deduction on Sche A. Unless the expenses were capitalized, and I assume that is done by election at the partnership level on its return annually.

[dmj4]

I found the answer. It is not deductible as an ordinary loss, and I believe this would apply to the LLC mentioned by dmj4 as well. It is supposed to be shown as a deduction on Schedule K, Line 13 Other Deductions, and passes through to Box 13, Code W on the K-1. Therefore, it would be treated the same as expenses held for "management,...or maintenance of property held to produce income" by an individual and subject to deduction on Sche A. Unless they were capitalized, and I assume that is done by election at the partnership level on its return annually.

Burke, thank you for this information. In the case of my clients, the LLC is all family members. The land is farmed but not in the LLC. The income and expense for the farming operation is reported on the MFJ 1040 of two of the family members. Those two members (parents) receive K-1 forms with the taxes as discussed above, but that loss is also shown as an SE loss on the two parent's K-1 forms. The third partner gets a K-1 with nothing on it. I don't know about the 4th K-1. The three K-1 forms I have seen all are listed as Limited Partners. My understanding is this LLC was set-up to protect the 120-year family farm from the possibility of divorce and/or the step-children of the two sons.

Does the above change anything? I don't do the Partnership return. The above is just what I recall from what I have been told.

[Burke]

Well, I don't understand how "the land is farmed, but not in the LLC" if the LLC owns the property. All of the income/expenses (including the taxes) should be shown on the partnership return, IMO, and pass through to the partners via K-1's. If it is a working farm loss, it would be an ordinary loss. Then it would be carried to the partners'/members' 1040 and Sche SE. This sounds like a Family Asset Limited Partnership LLC. To what extent those percentages are divided up depends on the partnership agreement and what it says. The K-1's should show the partner's interest percentage. I am not sure why any member would receive a K-1 with nothing on it. These can have a managing member (the parents), and the other members may have no voting rights, or other restrictions. Sounds like a trust would have been a better arrangement. The property would not get a stepped-up basis in this situation. Interesting case. My answer above concerning the taxes would not apply here, as this not just vacant land held for investment or resale.