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4797 gain from property sales on 1065


David

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LLC business provides funds for clients to rehab properties and when these clients sell the properties, the LLC gets a return on the funds provided. Real estate funding is the main business purpose for the LLC.

The LLC also purchased and rehabed 3 properties and sold the properties for a gain.

When I reported the gain from the sale of the properties on Form 4797, the K-1 excludes this gain from line 14, self-employment earnings. The gain is properly reported on line 6 of Form 1065 and the return on funds provided is properly reported on line 1 of Form 1065.

Both the returns on funds provided and the gain from the sale of properties is properly reported on Sch. K-1, line 1 ordinary business income.

I thought the gain from sale of the properties is subject to the SE tax since the property sales are part of the LLC's business. Why is the ATX program deducting the gain on line 14 of the K-1 schedule?

On the detail - items tab for the K-1, the formula for line 14 is subtracting the gain shown on line 17 of Form 4797 (ordinary gain) from the SE earnings amount. Is this a program glitch?

I thought any gains reported on Form 4797 was subject to the SE tax when reported on Form 1065.

Can anyone clarify what is going on?

Thanks.

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Page B-17 column 3 of Small Business Quickfinders states that "....The ordinary gain from Form 4797 reported on line 6 of form 1065 (page 1) is not subject to SE tax. See the IRS Schedule K instructions for the worksheet for figuring net earnings (loss) from self employment."

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Why are sales on Form 4797? Isn't that for the sale of property that has been USED in a business, such as equipment or a vehicle that's being upgraded? Wouldn't the properties purchased FOR SALE be inventory instead? Haven't had property sales on a 1065, so I'm extrapolating here and maybe off track.

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Sale of inventory, you know, Revenues/COGS/etc. Yes, if the properties he sold were inventory destined for resale, they feed into profits and SE tax. If he is now selling a house that had not been inventory but a long-time rental, business asset, then it's on 4797 and, I guess, not adding to SE. But, you said the intent had been to resell those particular properties.

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Thanks for your help. I guess I may have been looking at this incorrectly.

Since the primary purpose of the LLC is to provide funds to clients to purchase, rehab and sale/rent properties, I thought only the return on the loans was considered revenue.

Since the LLC also purchased, improved and sold 3 properties in 2009, I thought this was reported as sale of properties on Form 4797. Since the top section of Form 4797 asks for the gross proceeds from sales reported on Form 1099-S, I thought Form 4797 was the appropriate way to report the gains from sale of these 3 properties.

Now I'm wondering if the gain from the sale of the 3 properties is really subject to the SE tax. Since the sale of properties is not the primary purpose of the business are the gains from selling the 3 houses really subject to the SE tax?

I just don't want the client to pay more tax than he should if the gains from the sale of the 3 houses shouldn't be subject to the SE tax.

Thanks.

Sale of inventory, you know, Revenues/COGS/etc. Yes, if the properties he sold were inventory destined for resale, they feed into profits and SE tax. If he is now selling a house that had not been inventory but a long-time rental, business asset, then it's on 4797 and, I guess, not adding to SE. But, you said the intent had been to resell those particular properties.

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