Family Limited Liability Company (LLC)

[Outlook]

My client created a Family LLC. The only members are family members. The Family LLC purchased a vacation property. The vacation property has no rental activity or any other business activity. It exists as an investment property. The intent is to transfer ownership from the parents to the children using the annual gift exclusion over time. The Family LLC exists only for estate planning purposes and the property is an investment. My questions:

1. My understanding is that a Family LLC must have a business or investment purpose to be valid. Will the vacation property meet this test?
2. Is value appreciation (of the property) considered a marital income producing factor?
3. The annual out of pocket expenses will be property taxes, utilities, repairs and maintenance, etc.. Are these expenses considered "portfolio" expenses? If so, are these expenses reported in Box 13, code W, on the Partnership K-1 as other deductions?
4. Can the our of pocket expenses be capitalized and added to the cost of the property each year rather than report on Schedule K-1?
5. Because there is no direct business / rental income activity and portfolio expenses are no longer deductible on Schedule A, Form 1040, would the purpose of filing the a Partnership (1065) tax return be to track ownership changes and the ongoing cost basis off the property?

Any input would be appreciated. Thanks

[DoubleO]

The annual out of pocket expenses you mention sound like personal expenses to me. The property taxes w/ probably be deductible on the personal returns, but from what you state, the whole property sounds as if it is personal use property and not portfolio property, and it should be treated accordingly.

Is the property just sitting there with no use at all?

[Outlook]

The property is being used at this point as a vacation home for the family. Remember, this is set-up as a Family LLC with multiple members. The LLC owns the property. Shares representing owners hip will be transfer to family members in the future. As much as I'd like to treat expenses as personal and report on 1040, I can't ignore the partnership reporting requirements (1065) - maintaining ownership shares and tracking cost basis, etc.. The issue as you note, is there is no ongoing business, no rental activity, we simply have the investment property. So, have they met the criteria for having a Family LLC and what to do with ongoing expenses that support that asset?

[Lion]

I'd be concerned about the personal use of the vacation home.