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Old 06-08-2012, 09:01 PM
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Bought land under LLC, split into 2 lots, can we have 2 K-1's?

A friend of mine and I bought a house on a large inner-city acre, leveled it, and split into two equal lots for sale. Sold one in 2008 for 450K and the second in 2010 for 290K.

Can we do two sets of K-1's for this, one for lot1 and the 2nd for lot 2? There are two of us in the LLC.

We were active participants and both full time real estate at the time.

We had a gain on the 1st lot and a loss on the 2nd.

Thanks



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Old 06-08-2012, 10:55 PM
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“A friend of mine and I bought a house on a large inner-city acre, leveled it, and split into two equal lots for sale. Sold one in 2008 for 450K and the second in 2010 for 290K.Can we do two sets of K-1's for this, one for lot1 and the 2nd for lot 2? “---->I guess so; PMMLLC, as a partnership,’s net income items of partnership income, deductions, gains, and losses flow through to the partners and are included in the taxable income of the partners for the year in which the partnership’s taxable year end. Sale of the land that yourMMLLC held for more than one year would indeed be reported in the Long Term section of Sch D/Form 8949, and your gain can be netted with other capital losses(if you have),i.e., stock losses. Each of the two partners in the MMLLC needs to file his own Sch K1 of 1065 (on line 9a for NLTCG/ (loss)) and on Sch D, line 12/Form 8949 o line 3 PART 2, Long-Term Capital Gains and Losses—Assets Held More Than One Year, for each of the sale of the lot in 2008 and 2010. Capital Gains and Losses on the sale of th elots in 2008/201 are separated items that may be subject to special tax treatment by a partner are reported separately on SCh K1 of 1065 and SCh D/Form 8949 and on 1040 line 13.
“There are two of us in the LLC.We were active participants and both full time real estate at the time.We had a gain on the 1st lot and a loss on the 2nd.”----->Capital loss incurred on the sale of the second lot in 2010 can only offsets capital gains, or yu can carry your capital losses over to the next year/indefinitely for offsetting if they are more the gains for the year.



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Old 06-09-2012, 09:08 AM
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Thanks for the answer. So it sounds like we can treat the land/lots as separate projects. So we could do 4 K-1's, 1 set of 2 (for each partner) for each lot treated as its own project/business. Correct? Thanks.

Also, I have always understood that the losses and gains for our properties were treated as ordinary income as we are in the business as a profession.

Section 1221 of the Internal Revenue Code essentially excludes from the definition of a capital asset any property held for sale in the ordinary course to customers. This means that a residential real estate developer must treat the profit from lot sales as ordinary income.

Am I off base?

Sincere thanks.



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Old 06-09-2012, 02:39 PM
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“So it sounds like we can treat the land/lots as separate projects. So we could do 4 K-1's, 1 set of 2 (for each partner) for each lot treated as its own project/business. Correct? “---->Correct
“Also, I have always understood that the losses and gains for our properties were treated as ordinary income as we are in the business as a profession. “---->It depends. A business usually has many assets. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property ,i.e., building or equipment or etc.used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction. The sale of inventory results in ordinary income or loss.

“Section 1221 of the Internal Revenue Code essentially excludes from the definition of a capital asset any property held for sale in the ordinary course to customers. This means that a residential real estate developer must treat the profit from lot sales as ordinary income. Am I off base?”---->It depends. Regardless of the holding period, not all property qualifies for capital asset treatment. Generally, nonbusiness property including your residence, auto, stamp collection, etc. is a capital asset and if sold at a profit, qualify for capital gain treatment. However, you can't take a capital loss unless the property was held for investment. Depreciable business assets and land used in a business are not capital assets, but, under another Code Section 1231 they can get special treatment. Property held for sale in the ordinary course of business (inventory property) is NEVER a capital asset. This is where real estate developers and agents, other dealers in property (such as art or antique dealers) and, occasionally investors, get into trouble. Sometimes it's clear that the property is inventory. For example, a real estate developer who purchases 10 acres of land and promptly subdivides and begins advertising and selling either bare land or lots with houses constructed. But other times it's not so obvious. That can be the case where a developer/ real estate professional owns a number of rental properties and sells one or more. Were the properties held for investment or as inventory for sale? If held for investment the property could be a capital asset. The outcome turns on whether the property was held primarily for sale. In Malat v. Riddell the United States Supreme Court defined "primarily" to mean "principally" or "of first importance. Section 1237 provides a special rule for determining whether a taxpayer holds real property primarily for sale to customers in the ordinary course of his business under Sec. 1221(1). This rule permits taxpayers qualifying under it to sell real estate from a single tract held for investment without the gain being treated as ordinary income merely as a result of subdividing the tract or of active efforts to sell it. The rule is not applicable to dealers in real estate or C corps. In addition, if there is other substantial evidence to show that the taxpayer held real property for sale to customers in the ordinary course of business, activities in connection with the subdivision and sale of the property will be taken into account. Three conditions must be met:the tract, or any parcel, can not previously have been held for sale to customers in the ordinary course of a trade or business, and in the same taxable year in which the sale occurs, the taxpayer does not hold any other real property, and no substantial improvement that substantially enhances the value of the lot is made by the taxpayer, and the lot or parcel, except in the case of real property acquired by inheritance or devise, is held by the taxpayer for a period of 5 years.There is a court case. QUOTE,” In Phelan v. Commissioner, (T.C. Memo 2004-2006), the U. S. Tax Court was faced with the following facts: Mr. Phelan and two other individuals, all of whom were active in commercial real estate DEVELOPMENT in their individual capacities, formed a MMLLC to acquire a 1,000-acre tract of land in Colorado. The stated purpose of the LLC was to HOLD the land for eventual sale to developers planning to build residences and office buildings on the property. The tract of land was the MMLLC's only asset at all times during the years at issue. The MMLLC eventually began to sell portions of the land tract, including a small parcel to an identically owned development corporation, which developed the land until it was suitable for residential homebuilding. The small parcel was then sold to an independent builder. As a pass-through entity, the MMLLC is taxed as a partnership; it pays no income tax on gains, but passes them through to its members. In this instance, the MMLLC reported the allocated gain to the members as a Long-Term Capital Gain(NOT Ordinary Gain) subject to the capital gains tax rate in their personal tax returns. I guess you can contact the IRS for more information in detail.”



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