Margaret CPA in OH

Thanks, KC, for sharing this. I had no idea... In an already divided society where so many of us search out only things which support our already decided opinions, it is not at all productive or educational to have the internet tools we use further this. How will we ever even consider that there may, in fact, be some validity in another point of view when we shield ourselves intentionally and otherwise from them. Much food for thought and now we are alerted.

So THESE are the reasons! I've been wondering for more than 50 years about this - so great to have it all summarized. Thanks, Elrod!

Thanks for more thought, jainen. No, I cannot cite any authority and am not averse to making the remaining interest nondeductible. The clients will be more than a bit dismayed, to be sure. The original business plan was, in fact, to purchase and fix up houses in challenged neighborhoods for resale. It happens that the first 3 properties wouldn't sell (market was already declining) so they rented those. This last one was purchased and fixed up then sold to son. I haven't asked whether that was the original intention (I suspect so but no proof). I was told that the plan was to pay off the mortgage with the sale proceeds and that didn't happen. The selling price is fair for the market, though. I don't believe there was a bargain price. They did gift equity of "$15,150 plus seller's concessions of $4033.81 but an earlier discussion on this board seemed to agree that this was not an issue - although it did increase the selling price listed by those amounts. Sorry I used the word 'inventory' in error. It was to distinguish this property from rental properties. If there is a better term, please let me know. If the interest to date of sale cannot/should not be capitalized as basis of the asset, is all the interest non-deductible for any purpose? That will be tough to explain when I am grasping already. Thanks again for the discussion and more to consider.

Thanks to you both. There has, to date, been no cash out to the partners. The LLC owes so much money... The members will probably never see full repayment of all the funds they have loaned to the LLC for operations let alone the interest accrued on those loans. When I wrote 'cash out to the LLC', I meant that the LLC received some cash but it was not distributed to the partners. It went into the operations account. The other thought I had was that the entire mortgage proceeds be treated as operations funds with some/most going to the investment in the inventory of the subsequently sold property and the rest of the funds (not truly traceable, however) towards materials, subcontractors, etc. to make the property suitable for sale. But I then keep going back to what I know: the LLC bought this property with the mortgage proceeds on the one rental for the purpose of fixing up within the LLC then selling to the son of the members. So I know that the 90.3% (and maybe 100%) of the funds went to the purchase and remodeling of the inventory house. So tracing rules... I just wish they had paid the frikkin' mortgage off with the sale proceeds as they said they were going to do. There was certainly enough - $86,000+ for a $56,000 mortgage. But they didn't so I have this issue with the interest. jainen, I believe all the proceeds ultimately went to genuine business purposes. So that makes the remaining interest (following the sale of the inventoried house) deductible as operating expense, right? I have created classes of each property and a class for operations in QB (based on what they said were there business plans several years ago). Until the inventory sale, the mortgage payments were classed with that property. Now subsequent payments (principal and interest) go to operations? Retirement is lookin' really good now...

I believe the difference here is that, in my client case, the member/partner was incorporated, received wages as an employee, and also used subs at times. He/S-corp properly invoiced the LLC and payments were made to the corporation. If the op situation was simply an unincorporated sole proprietor trying to wear two hats, then I agree with Lion and Jack from Ohio.

I have had a contractor (S-Corp) do remodeling work on rental property owned by an LLC of which he and his wife are the members. Invoices were properly prepared, 1099's issued where needed, prices were reasonable for an outside company. I saw no problem with this. The wife wasn't always thrilled that husband was working so many more hours but he did most of the work on weekends when not working at other jobs.

I finally have all (I think!) the data from LLC and am going a bit crazy trying to figure this out. LLC bought Property A for cheap (cash, no mortgage), fixed up a lot and is renting. Then bought another property B by mortgaging Property A. That mortgage paid for B but cash out to LLC was 9.7%. B was inventory and then sold to son. My thought is that the mortgage interest payments to date of sale were all capitalized with inventory property but what about the 9.7% cash to LLC? And subsequent interest would be operating expense, correct? The cash was used for general purposes and (darn it!) they did not pay off the mortgage with the sale proceeds so a significant balance is outstanding. Thanks for direction. I think I will 'fire' this client after this. They keep shifting money from one to another of 5 accounts and tracing is making me crazy.

That was the most valuable lesson I learned in graduate school. There are, of course, basics but it is often better to know where to find the exact information needed than recalling approximate information that may be outdated.

My deepest sympathies, KC. This extended family of yours here holds you and your near family in our collective arms, thoughts and prayers.

Actually the LLC mortgaged another property for $56,000 to buy and fix up this one. Then they put another $20,000 plus the interest into it. That mortgage was not paid off. I am now in the process of determining how much of the interest is to be capitalized. The original plan, they said, was to pay off the mortgage when this property sold but that wasn't done. The balance is still on the books and is owed. I really don't care what the buyer son's basis is. I am just trying to get the selling price correct (and clear in my brain) in order to determine the gain or what may end up being a loss. Somehow something just doesn't feel right to me. Thanks for the 80% figure, though. It wasn't a replacement loan but does avoid pmi. I think you are correct that the selling price will be what they received, $86,708, and all the rest is make believe, more or less. Thanks again, jainen.

I actually don't care about the basis for the son but the tax basis is the or $101,000. My main concern is that, perhaps, the LLC parents boosted the selling price because it was market value. Son couldn't afford that so a gift amount was included. With that action, the recognized gain will be understated. The LLC parents received $107,923.29 of which $15,150 was the equity gift, $813.32 seller prepaids, and $4,033.81 seller's concessions (whatever that is). The mortgage proceeds were $86,708.00. This is just a tad bit confusing to me, frankly.

Anyone care to chime in? Please?

I'm revisiting this topic I earlier posted because I am now wondering about related party transactions. If the selling price is reduced by the equity gift, the gain will, of course, be significantly minimized and flow through to the members (parents of buyers). If the recorded selling price (market value) is used against the basis, the gain would, in my opinion, more fairly be that of an arm's length transaction. My original inclination, and others agreed, was to deduct this gift as an adjustment to the selling price. I'm rethinking this because, as KC wrote, the buyer (kids of parent members of LLC) would have the increased basis at fmv. Any other opinions? Thoughts? Thanks!

That would be me, too. Sometimes when it is loading, I may be typing something elsewhere and suddenly the first name on a completed return has changed (wish they would fix that!). But I always know it won't stay. I occasionally my change some factors in the Planning, print the change, then close, but not save. I like that feature - quicker than duplicating when unnecessary.

Here's another two monitor person. I, too, will never go back. I also actively decided against a single super large monitor with multiple windows. I consistently and have for about 3 years had the prior year on the right monitor and current year on the left. Greatest thing since (your choice)!

Daughter of a client was in Paris for several months in 2011 and received the equivalent of a W-2. However, she cannot translate nor will anyone here from Alliance Francaise. She of course would not meet any of the exclusion criteria but I think she would qualify for the foreign tax credit with tax withheld on her wages. Suggestions?

I feel sorry for all living in those areas with the coming pollution above and below ground. I don't believe the payments received by anyone are enough for the damage that will be caused or even the risk involved. I'm not intending to start a dialog about fracking and won't participate - just had to, on this occasion, express my concern and dismay. A favorite saying from a 19th century Cree Indian: Only when the last tree has died and the last river has been poisoned and the last fish has been caught will we realize that we cannot eat (or drink -my insert) money.

Thanks, KC. I wasn't worried about the gift from mom and dad, it was the fact that the LLC (from their perspective) gifted to the son and wife. Isn't it amazing how so many don't quite grasp the concept that their company is a separate entity? So with the reduced selling price, I expect the proceeds would also be reduced as the amounts 'paid' by borrower include this same gift of equity. Then there is the famous 'seller's concessions amounting to $4033.81. It's almost as if the selling price was determined then figures had to be input to get there, maybe to warrant the amount of the loan? What do I do with that? I'm grumpy about this in general because I received the file Friday night and the documents today. And I leave for vacation Sept. 8.

So here we are at the last minute and I just got the sale document. LLC, mom and dad, bought house, rehabbed (not the first), and sold to son an dil. I see the selling price of $101,000 and Gift of Equity of $15,150. They will not be clients after this year, I swear, but how is this to be handled? Reduce the selling price?

That sentence is worthy of saving, Tom. And I have done so on the outside chance I might need it someday.

Thanks, Pacun, for the follow up. I seem to recall that you were quite involved in the earlier threads about this and what you stated rings a bell. I think it is so short sighted of the bank to not work with this guy, though. They will end up with a poor property that will only decline further without active management.

Thanks so much for this, Jack. I suspected this was the case and warned him as I've read so many posts this past season from others. But before giving these unfortunate answers, thought I would just double check with this amazing resource. As I recall from earlier posts, there may be a timing difference which could help him get together some resources I feel badly for him as he was trying to do the good thing by providing low income housing in a tough neighborhood. Too bad the original good tenants left over the years.

A client just called with the following question: "I'm behind 4 months on my FHA loan and the lender denied a short sale because the property has had tenants there for the last 18 months. I tried getting a reduced interest rate but re-writing a loan with 20yrs left to a new one with a lower interest rate for 30 yrs ( the only term they would offer me) made me pay more. They denied refinancing the loan because I owe more than it is worth with the down economy. Question #1 If I let the home go into foreclosure, can the lender/investor come after me with a 1099 for the difference being that it is a FHA Loan? Question #2 If I do a deed in lieu of foreclosure, can the lender/investor come after me with a 1099 for the difference being that it is a FHA Loan?" This relates to one of their rental properties in the inner city. It has put a severe drain on their finances and relationship. There used to be good tenants but he said the current ones are destroying the property and he can't afford the legal expense to remove them. He thought he was doing the right thing by keeping it occupied but now is penalized for that. He kept up the payments until Wells Fargo said they wouldn't do anything unless he was behind in payments so he stopped payments. Any ideas or suggestions? He is my first client dealing with any of this stuff and it is a rental, not their personal residence. Thanks in advance!

Tom, you dog... although you may be right, too. But she is a really good speaker, at least in conversation and, of course, on this board. Just don't cross her - she's armed and a really good shot.

Different strokes... I distinguish between excess, mixed up client information that is disorganized and voluminous from clearly marked orderly highlighted or red marked pages stating (I have a stamp) DO NOT PROCESS ATTACHMENT TO FORM 1040X ONLY or 940. If the amended form is on the top, the auditor, agent, even the client is free to pay attention only to that and disregard and/or discard any and all other documentation deemed superfluous or irrelevant. Different strokes - I have yet to be reprimanded, chastised or otherwise corrected for doing this. On the other hand, I have had relatively few amended returns of any kind.