Discussion:Attorney forms SMLLC to flip one property
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Discussion Forum Index --> Tax Questions --> Attorney forms SMLLC to flip one property
Bottom Line (talk|edits) said: | 3 February 2008 |
| A full time attorney formed a SMLLC to flip one property. The SMLLC was formed specifically to purchase a residenial condo and flip it. The SMLLC was formed and closed during 2007 and was in existance less than 6 months. The residential condo was purchased and sold in approximately 3 months (all during 2007). No improvements were made to the unit. The attorney formed the SMLLC himself and the only cost was the state fee of approximately $80. Interest expense was approximately $500. The only other expenses were title search ($300) and prorated RE taxes ($75). There were no auto, utilities, phone, etc expenses. The full time attorney has no plans to do this again even though he made about $15,000 for less than 10 hours work.
Any reason not to show the entire deal on Sch D as a short term capital gain and add all the costs to the basis? | |
Southparkcpa (talk|edits) said: | 3 February 2008 |
| That sounds correct to me as a disregarded entity.
I put single member LLC's on schedule E all the time. | |
Bottom Line (talk|edits) said: | 4 February 2008 |
| Thanks Matt | |
| 4 February 2008 | |
| Why are attorneys doing this, setting up theses entities when they aren't really necessary? My understanding is that the IRS will look for a schedule C or E with the SMLLC. I have handled SMLLC properties like this as well (sch D & E). If they rise to the level of a business then it should be on a C.
I have a few clients who also did this as MMLLCs - spouses and/or friends. The IRS will expect the 1065, though for spouses they could file the E. | |
| 4 February 2008 | |
| I would suppose they're doing this for the "LL" part - the limited liability. | |
| 4 February 2008 | |
| my understanding of the limitation is that you are limited to your "own acts" - beneficial in a MMLLC, no so much in a SMLLC. Best bet is to have adequate insurance. Since the LLC is state specific, I am sure it is more beneficial in one state than in anohter. | |
Bottom Line (talk|edits) said: | 5 February 2008 |
| It only costs him $80 in state fees and less than 5 minutes of his time. He's an attorney and knows a lot more about liability than I'll ever know. If he thinks it's worthwhile, I'm not going to argue with him over this small amount of money and time. | |
| February 5, 2008 | |
| Liability is exactly the reason they do this. I worked with someone who had about 20 LLCs, each with its own property. | |
| 5 February 2008 | |
| You know, if you're half way through a flip, and things go flop. Sound familiar? Prevents the brick mason from using YOUR fireplace next Christmas to keep warm (sorry, can't help you with the broken windows though, right Krazy Kat?). P.S. keep in mind, it's not just the slip and fall you are worried about, it's those pesky creditors too if the deal sours. | |
| February 5, 2008 | |
| Good points Crow. I understand there are many issues with real estate, and if someone finds an issue they think should have been disclosed prior to the sale, things can sour fast. | |
| 5 February 2008 | |
| the LLC laws are state specific. Hasn't anyone else seen an LLC created only to have the LLC not hold title to the intended property? The creator of the LLC & the SM was the attorney (from the initial post), so I would think that they would know what they are doing for their state. Very often the member guarantees the note (if in LLC name) or cannot get the loan in the name of the LLC so they are not protected from the creditors. The best bet as I understand it, is to have adequate insurance - the slip & fall. | |
| 5 February 2008 | |
| Problem here is that there really isn't a good reason to hold property in the name of an LLC under the facts described by Bottom Line.
The property was simply bought and sold, not improved or rented and there's no mention of any employees. Because individuals are personally liable for their actions and omissions, the owners of the LLC (I assume they or their real estate agent personally negotiated the sale) would be liable for any harms to the buyer as a result of any failure to disclose. Thus, the only benefit of the LLC would be if someone suffered a personal injury on the property that was not directly attributable to the actions or omissions of a member (or if some creditor of the LLC was foolish enough not to insist on a personal guarantee from the members). Asset protection really has become a shady practice as many attorneys are placing people into entities that they really don't need and allowing these people to operate under the incorrect premise that their personal assets are shielded. Not to mention that many attorneys simply file these business entities and give very little guidance (if any) as to the maintenance required to prevent some plaintiff's attorney from ripping through them like tissue paper. Sorry for the tirade and I don't mean to imply this attorney is a crook (there could certainly be other facts not listed by BL that make the LLC completely appropriate and necessary). This stuff just drives me crazy and I cringe whenever someone wants to discuss "Asset Protection" with me. | |
Bottom Line (talk|edits) said: | 5 February 2008 |
| Boy - This really opened up a kettle of fish. Sounds like no one is arguing against Sch D though. | |
| 6 February 2008 | |
| Another issue is management fees - individual must buy property as an individual (or married couple) due to financing, 1031 etc. They do not want their tenants to really know who they are, so they create an LLC. What now? The LLC may be either a smllc or a mmllc & "manage" the property as such for the owners, the same owners of the property. Ordinarily, withouth the LLC, this would be a sch E filing for rental income, but does the word "mange" mean that there must be some Sch C income? Although logic would say they are the same people, by owning the prop personally & running income & expense through the LLC I can see the argument made (& I believe the IRS would make this argument) that payments to the owners are management fees & subject to self employment and I believe that if they have multiple properties "managed" in this way, they are most certainly subjecty to SE even when tose payment would otherwise not be subject to SE. In this case, if the owners payments were not reported on C it would be a 8275 disclosure item, I think & then - I'd hate to be the accountant! This is uncharted territory, unless I have missed any cases on the subject. One way to get around this might be to state a management fee amount & have a management agreement, but then you are locking yourself into SE tax for a rental not ordinarily subject to SE.
I see attorneys who set this up without thinking of the tax ramifications. For one purchase & sale, sch D absolutely. If someone plans to do this regularly & coinsistently in an LLC, it could rise to the level of a business where the gain would not be a schedule D, but the property treated as inventory. Also, starting several LLCs, one for each property, for this purpose will not make a difference in determining whether or not it is a business. | |
| 6 February 2008 | |
| But there are other creditors besides just the bank? The unsecured creditors performing the work on the property. Vendors that supply materials. These technically have a lien right if IF properly filed for unpaid work, but those are enforceable against the construction property itself, not the man's personal home in the first phase of the lien. So, the LLC would still prevent a possible personal judgement on these type bills: i.e. to perfect the lien, you would enventually have to sue, and you could only sue the LLC. You bet I'd set up a LLC for each project, but it's relatively cheap to do so in my State, not so in some others I understand. I do agree with Dingodile that in many cases, maybe this one, it could be overkill. | |
| 6 February 2008 | |
| Hi Wow another mountain out of a molehill and some people who have no clue on LLCs. put it on D and end this discussion. bye | |
Death&Taxes (talk|edits) said: | 6 February 2008 |
| I have a nice photo of Mt. Katahdin but I haven't foggiest idea how to link it. | |
Death&Taxes (talk|edits) said: | 6 February 2008 |
| And if one hand wants to manage and the other wants to own, set up a S Corp to do the managing of the LLC owned property. In fact, if there is more than one member, set up an LP to own the real estate, 49.5% each and have the S Corp be a 1% owner. That is what some Philadelphia lawyers do for same sex couples. | |
| February 6, 2008 | |
| The people I worked with had a corp that managed all of the properties. Buying, improving and then selling properties was definitely part of their business. | |
| 6 February 2008 | |
| good point CrowJD. LLCs aren't simple and anyone who thinks so doesen't know enough about them. They are chameleons. | |
Bottom Line (talk|edits) said: | 7 February 2008 |
| Thanks Wes | |
