Land and partnership

[JG EA]

Excuse: I'm in the middle of one of the types of returns I hate the most. I'm trying to put together lots of disjointed information from Quickbooks, from written records, from verbal information and nothing seems to make any sense to me right now. So, I'm a little confused.

Fact: LLC taxed as a partnership has 2 members (hus/wife). They want to build a building to use in their partnership business and have already purchased the land.

Question: The land is in their names - can they record the land in the partnership books. They want to claim the interest, taxes, fees against their business income on their partnership return.

Or: does it have to go on their personal return as investment income now? And if this is the case, then when the building is built is it depreciated on the partnership?

[Corduroy Frog]

Legal Question

JG, this may be more of a legal question than a tax question. The mere recording of land ownership on partnership books, or even a document transferring the land from the owners to the partnership will not perfect the ownership.

Some transactions are subject to the Statute of Frauds, meaning the transfer must be recorded to be valid. This includes the conveyance of ANY land.

There may be some ingenious way for these taxpayers to still take full advantage of all the deductions you mention, but if these folks want to "lock down" the deduction, they'll need to get the land transferred properly. If I were them, I would certainly want full deductibility of interest, rather than the possibility of Form 4952 stuff, where it is subject to thresholds and phaseouts.

[JG EA]

C F

Thanks I see the point - the land is in their name now. So, keeping things simple I'll count the interest on their personal return as investment.

So, if costs to build the building all come out of this partnership then there would be no problem to consider it owned by the partnership would it?

I know dumb questions, but things are a bit muddled in their whole return and I get caught in the mud and can't pull out. I'm working on a good way just to do the return with the mess I've got. I think I've come up with a way that doesn't involve reentering the year's worth of hundreds and hundreds of transactions, but I'll know better when more is done to see if it will work.

[Corduroy Frog]

Building

Building appears to be paid for by partnership, but the building should be in the name of the partnership. This can be the case, even if the land is owned by individuals.

If building is in the name of the individuals, then all of the costs paid for by the partnership would technically be distributions to the partners.

Partners often operate non-chalantly and have a porous, ill-defined interactions conducting their transactions with the partnership. This can be harmful, and is often a pre-cursor to one partner obsfucating resources or time out-of-balance with the other. Be careful, and advise your client to do the same.

[George Boutwell]

Check Latest Legislation

There are some provisions in that tax bill passed last week (with changes in preparer disclosure requirements, among others) that deal with husband-wife partnerships. I haven't had time to figure out what they mean yet; it sounded like it allows what is already being done, splitting the income and expenses on Schedule C without filing a 1065.

[Gretel]

JG, I know you didn't ask for this, but would it be a consideration to own the building in a separate LLC and rent it to the business LLC?

One reason would be to limit liability. The other to maybe reduce SE taxes. You will run into the self rental issue here but I believe in case of 2 LLC's it would not be a problem. But to be honest, I am no expert here, to the contrary, I am confused about this issue myself and maybe it could be argued both way.

Someone will shine his expert opinion on my confused mind.

[Corduroy Frog]

Not Me

Sorry Gabriele, it won't be me.

If you're really desperate for an expert opinion, waft your request upon siren winds, and maybe [POOF!!] some acerbic guru will inundate you with a gush of knowledge.

Jainen and Old Jack, did you hear Gabriele wafting her request??

[Davc]

There are some provisions in that tax bill passed last week (with changes in preparer disclosure requirements, among others) that deal with husband-wife partnerships. I haven't had time to figure out what they mean yet; it sounded like it allows what is already being done, splitting the income and expenses on Schedule C without filing a 1065.

That provision would be for tax years beginning after 12/31/2006

[jainen]

the question has been adequately addressed

>>Jainen and Old Jack, did you hear Gabriele wafting her request??<<

I think the question has been adequately addressed, at least as far as the information given so far allows. Although it's a free country and they can do whatever they want with their own property, the tax deduction has to be supported by their records. If the record isn't there, neither is the deduction.

This isn't the sort of problem that can be fixed by the tax preparer or even a bookkeeper. They have to clarify title as to what exactly are the partnership assets. Title always involve more issues than just taxation, so this ambitious couple needs to confer with other advisors such as an attorney and an insurance broker.

[JG EA]

Thank you

Thanks to all for your help and things to think about. I guess I was looking at the building the wrong way also. They will construct (or have it constructed) with the partnership funds, but that would not make it owned by the partnership unless something legal was done. I'm assuming this something legal would be how it is listed on the tax register, and so on. So, burden on them - I'll make a better point in the future of asking how things are titled.

And Gabriele that was a good idea, but I am also concerned about any kind of self rental, except a building owned by an individual and rented to a corporation. The reason - SE is already limited by reasonable compensation in a corporation. In a Schedule C or a Partnership it is not. LLCs do not compute as separate entity in my mind, but rather how they are taxed.

[equinecpa]

Usually one of the reasons for operating as an LLC is to protect ones personal assets. Often times this is real estate. I would not recommend they put the land or the building in the LLC's name.

What I recommend to my clients in these circumstances is to lease the land and building to the LLC. Actually write up a lease agreement and pay rent to the extent of what is deductible on the personal return as a Schedule E rental. I'm careful not to create income or a loss. As someone else said, it's probably actually better to have 2 LLC's, one to hold the property and the other to operate the business.

I agree this is stepping into legal territory and I would recommend your client seek legal counsel.