How to handle expenses to buy property before LLC created

[Philip Pape]

I am in the process of closing on a property, so I have some expenses such as postage, travel, and such. I'm paying and tracking these under my real estate investing LLC.

However, I'm buying the property under a new 50/50 LLC with a partner.

How do I "transfer" the pre-purchase expenses to the property? Do I reimburse my own LLC from the new LLC's capital and then roll all those expenses into the property's cost basis? Or do I keep the expenses as business expenses under my LLC (Schedule C)?

[John Woodrich]

As I understand it, you have your own LLC and that pays expenses related to another LLC which is owned 50/50. If this is true, first off your 50/50 LLC should likely be filing a partnership return unless you have elected separate taxation. You will receive Schedule K-1 to report your share of any income or expense related to the 50/50 LLC.

In handling your expenses on your LLC, if they are indeed expenses related to that property (and your 50/50 partner agrees the LLC should pay them), you should consider it a capital contribution into the partnership and you will either expense the cost or add it to your basis. Upon liquidation of the partnership you will get reimbursed as the capital accounts are closed. Another way would be to have the 50/50 LLC repay you or create an un-reimbursed liability account. The company would pay you back when you have the funds available.

If the expenses are more general expenses (say mileage, or home office supplies) and your 50/50 partner doesn't want to share them with you, you should treat them as un-reimbursed business expenses and attach it to the K-1 you receive from the 50/50 partnership.  Allocating to the K-1 will bypass the Schedule-A limitations.

Hope that helps.

John Woodrich, CPA