Should this asset be a capital loss?

[sandigi]

Can somebody please help me with a dump truck?

My client bought a dump truck to haul fill dirt to vacant land he was originally developing for his personal residence with his wife. He then got divorced and bought 2 abutting parcels with his partner in a 2-man partnership. The plan was to develop all 3 plots and hopefully sell them as one commercial piece. So his personal dump truck was used then on the commercial property in the partnership.


Here are the details:
2016 Bought land #1 to build house with wife
07-09-2016 Bought dump truck
01-20-2017 Divorced
07-10-2017 Bought land #2 & land #3 (abutting to land #1) to develop and sell as a commercial parcel
01-11-2019 Sold dump truck for a loss (12,000)

I'm not sure what to do with this and will appreciate advice from you experts!

[BOB W]

Sounds like original partner contributed to the two man partnership property 1 and dump truck. Dump truck should be treated as a business asset and disposed of like it was.
Either way, I don't believe you will get any current deduction because all expenses need to be capitalized until the property is sold.

[Lion]

Did he contribute dump truck to partnership? In 2017? Did the partnership depreciate truck? What is adjusted cost basis of truck on partnership books? Did partnership sell truck?

[ATSMAN]

Your client sound like a fellow I know. Same type of situation, got divorced formed a informal partnership with his brother to rehab and flip old houses including his own.

I think Lion asks the right questions. Was there a formal partnership, was a 1065 return filed etc. In my case it was a informal partnership between brothers. There was no intention to formalize it. It appears from your OP that it may have been rather loose with paperwork and bookkeeping? I would proceed with caution.

[BOB W]

I believe there is a case of substance over form here...……….

[sandigi]

Thank you all so very much for your response! I think I have it now. Can you kindly tell me if I'm correct?

Property 1 is in name of individual A (his sole-proprietorship LLC)

Property 2 & 3 are in name of Partnership, with Partner A & B.
A formal partnership exists since 2007. Inside the partnership are 2 rental properties, and vacant land parcels (currently 4 land parcels) 2 of them abutting to property 1 owned by A.

Form 1065 has been filed since 2007. The dump truck owned by A was never depreciated nor put into the partnership assets.

After talking with the client to clarify how the dump truck was used, he said it was used for property 1 because the land was too low and there was a water issue. He hauled in fill dirt to solve the swampland issue, and also built a dirt road on property 1. The road is also used to access property 2 and 3. But he didn’t really haul in dirt for property 2 and 3.

From your answers, I’m thinking the correct way to handle this dump truck is to drive it into (pun intended) the basis of property 1 owned by A, which is now an investment property. And he will capture the loss when he sells. Perhaps, the parcels will sell as one or as a lot of 2 or 3. Individual A (property 1) and Partners A & B (property 2 & 3) will report their respective capital gains.

Is this the right track?

[BOB W]

Since Partner A is a Sole proprietor LLC, I feel uncomfortable putting this property under his LLC. It deserves its own entity or non entity. What does Partner A do?

[sandigi]

Since Partner A is a Sole proprietor LLC, I feel uncomfortable putting this property under his LLC. It deserves its on entity or non entity. What does Partner A do?

He does everything! Well, many things! He has been a real estate investor for many years and a landlord. Currently he has 4 rental properties individually, and 2 with his partner in the partnership (that does file Form 1065.) He got his real estate license a few years ago and files a Schedule C for that. He was manager for a band and just filed the final Form 1065 for that partnership business in 2019 as it didn't go as expected.

Can't the dump truck be added to the basis of the property he individually owns, since it is a land development expense? Wouldn't it be a capitalized expense?

Thank you for your help, Bob!

[BOB W]

Wow, that is a lot of activities..... Seems he needs do a better plan in getting a separation of activities, if not for bookkeeping then for liability separation. Et Al insurance policies will cover multiple entities in one premium. And the same goes for his partner, too much under the same roof. Both need to talk to an attorney to better set up what they are plowing ahead with, without any cohesive plan for contingencies.

Yes the Dump truck needs to be made part of the site construction costs. As a personal asset, it is no better than selling a car at a lost and looking for a way to deducting on your tax return... No such tax law when it is personal use...…….

[sandigi]

Wow, that is a lot of activities..... Seems he needs do a better plan in getting a separation of activities, if not for bookkeeping then for liability separation. Et Al insurance policies will cover multiple entities in one premium. And the same goes for his partner, too much under the same roof. Both need to talk to an attorney to better set up what they are plowing ahead with, without any cohesive plan for contingencies.

Yes the Dump truck needs to be made part of the site construction costs. As a personal asset, it is no better than selling a car at a lost and looking for a way to deducting on your tax return... No such tax law when it is personal use...…….

Bob, thank you for your input. I appreciate your time and your advice. Everybody should have a client like this guy. He makes my job fun!

I’ve been doing his taxes for 20 years, since he was 19 years old. He is a very interesting kid (to me, he’s a kid). He decided when he had his first W2 job, he didn’t want to work for anybody else. He has tried different businesses over the years; limousine service, music supply and lesson store, band manager, sound engineering, and recording cd’s for a band and attempting to get signed with a label. He got a pilot license and bought an airplane for pleasure. When he paid to have his air conditioners repaired, he decided to go get his HVAC license and fix them himself. When he saw how much fill dirt was costing him, he bought the dump truck. The true essence of entrepreneurship resides in this kid.

I’ve been grooming him on the financial end and he has an attorney to help on the legal side. He does a great job at separating his activities, and has separate bank accounts. He provides me with the accounting figures and I do separate books for his activities.

When he became a landlord of more than one property, he became concerned about the liability and then formed his LLC, under which he has bought all future properties (except the ones he buys with his partner under the partnership).

The partnership is a Limited Liability Partnership and an attorney drew up the Partnership Agreement.

I just proofread this and I sound like a proud mama. Well, I guess I am! He is like a son to me. Thanks for allowing me this fun trip down memory lane!

[BOB W]

OK.... He is on his way to somewhere good...………...……..