Multi-member LLC for real estate investment

Forum|Forum|3 years ago
March 2, 2023
3 replies
0 views

I'm a member of multi-member LLC that purchased four lots of land 10 years ago. One lot was vacant and three had houses which have been rented off and on. Our initial investment was approximately $100,000. Since the LLC's inception we've had cash calls totaling $56,000. We've had net ordinary losses of $6,000 cumulative through 2021 and net rental loss through 2021 of $32,000. In 2022, we sold an insignificant amount of land to DOT for a right-of-way acquisition for $75,000. Will this income from DOT be ordinary income? Will it be taxable income for the partners?

TurboTax Business Windows

MinhT1

As you sold some land to the DOT as a right-of-way, you can assume that the cost basis of the piece of land sold is equal to the price you received.

You can enter this sale as a sale of land with the cost basis equal to the sale price with no gain. You will then deduct $75,000 from the cost basis of your investment.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

Mike9241

you may have sold an insignificant amount of land, but the cost of that portion might be insignificant to the sale price making the gain significant. if it is and you report no gain should the IRS catch this, you will be subject tol taxes, penalties and interest that could be significant even more so if this income affects other items on your return. if there is a gain it would be capital gain.

chuckntr5126Author

When I try to enter the asset disposition in TurboTax Business, the program assumes I am selling the entire asset and not just a part of it. What is the best workaround?

By the way, this sale only affects two of the four lots owned and should not be a taxable transaction (as you said) because it does not exceed our cost basis.

Thanks!

DaveF1006

I wouldn't enter this as an asset disposal since the program will assume you disposed of the entire asset. Instead, enter it in federal taxes>income>investment income>capital gains and loss.

The IRS writes the sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction. This way you can enter only the part of the asset that was sold.

Be sure after you do this to go back and readjust the basis of the asset that was sold by reducing the basis by thebasis amount that was reported in the sale.

@chuckntr5126

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

chuckntr5126Author

The sale does not quality for Section 1231 as the LLC's sole purpose in purchasing the land was to hold for resale. From 26 U.S. Code § 1231 (b)(1)(B) - property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business is excluded for treatment under Section 1231.

My understanding also is that because the LLC exists to purchase and sell land, any gain would be taxed as ordinary income and not capital gains.