Trying to pay less tax on money from llc
Rental Property Investor · Bridgeport ct · Member since 2017 · 73 posts · 22 votes
Trying to pay less tax on money from llc
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Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votesQuote from @Basit Siddiqi:
first need to identify if the transfer to the LLC was a contribution or a sale.
First need to get the partnership return done first before you can do your individual return and calculate the gain if any.
7 Replies
- 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
first need to identify if the transfer to the LLC was a contribution or a sale.
First need to get the partnership return done first before you can do your individual return and calculate the gain if any.
Basit Siddiqi CPA4.979 Reviews - Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
You do realize that pulling money out of the LLC's bank account doesn't trigger tax, by itself? The tax liability is starts with the LLC's partnership return, the 1065 if I recall, and then "passed through' to your personal return. Then, you figure out the tax.
Not sure what you mean by "refinanced an investment house into a two partner llc."
- 2yDillon KennistonBusiness MemberFinancial Advisor · Sinking Spring, PA · Member since 2016 · 28 posts · 22 votes
Hi @Ricardo Diaz, great question. As you point out, this is a tricky tax question, so I'd definitely recommend consulting with a real-estate savvy CPA before taking any action.
I'm a CERTIFIED FINANCIAL PLANNER™, not a CPA. Our service model includes tax planning, but we always encourage working alongside other professionals (CPAs, attorneys) to ensure that strategies are executed with all t's crossed and i's dotted. (So please do not take what follows as a recommendation for your specific situation. This is not advice; it's general info.)
That said, here's an opening shot:
1. "I refinanced an investment house into a two partner llc which I am one member. We received money and sits in bank account. I took some money out and find out I will pay taxes on it." I assume that the money you say you've received, from which you're taking a draw, is from the refinance, correct? If so, then in general, my understanding is that this would constitute borrowed money, and is therefore not taxed. Cash from a cash-out refinance may be taxed when a distribution is in excess of your basis (ie, You put $100k into a $1m syndication to purchase a $10m property. That property appreciates to $20m, the syndication refinances the property, pays off the previous loan, and distributes cash from the proceeds, and you get back more than the $100k you put in. The excess above your $100k basis could be taxable as gain. But the original debt, the $100k, is usually not.) Some may argue that the cash from an LLC cash-out refi is taxable on the grounds that you have to take the money out as an owner draw. But my understanding is that's not the case with a property refinance (again, unless in excess of basis [in which case, taxed as gain], or unless your lender forgives the loan [in which case, taxed as income]). To summarize: I can't say anything for certain without knowing details about your specific situation. But on the grounds of the 80/20 rule, I'd question the premise; make sure you really will have to pay taxes on it.
2. "Now I will be selling the house and dissolving the llc. now what is the best way or creative way to have that money and the money from the sale and not get taxed hard or not at all. Can I roll that into another llc for a future investment. ????" Here, we transition from refinance proceeds to taxation of a property sale. In general, the two biggest hits (besides commissions) are usually capital gains and depreciation recapture, neither of which are directly implicated through a refinance. There's no information provided about basis or depreciation, so I'll just say that the most common option for tax deferral on property sale would be a 1031 exchange. (Note that 1031 exchanges must not only be for like-kind assets, but must also be done by the same tax payer - or here, within the same entity. So if you choose the 1031 route, you may want to keep the LLC active. Note also that there are more passive options that are 1031-eligible such as Delaware Statutory Trusts if the real issue is you're looking to get out of property management.)
Another option might be a 721 UPREIT exchange. The idea here is to defer capital gains from property sale. It's similar to a 1031 exchange, but there are differences. For one, you're not exchanging real property for real property, but rather, real property for shares in a REIT. Also, 721 exchanges are "final" in the sense that, unlike with 1031 where you can 1031 property after property, with a 721, there's no need for additional future exchanges: you've basically pushed the capital gains deferral to its limit. But the benefit is you've deferred gains and are now into a more passive investment. (Just remember REITs can lose value. They can usually be sold more easily than real property, but this may trigger a taxable event and shares may be sold at a discount.)
You suggest that the sum of money you'd be paying taxes on is quite large. If so, and if the property is highly appreciated, and if you have the means of paying off the debt before selling the property, another option to explore might be a deferred sales trust. I believe deferred sales trusts will still recognize depreciation recapture in the year of sale, but this strategy would allow you to truly divest from the property while getting installment sale treatment for capital gains (which in theory could be deferred "indefinitely"; on this model, interest and dividends could be paid out but principal retained until you're ready to recognize capital gains over time). A key difference between a deferred sales trust and a 721 UPREIT exchange is that the deferred sales trust preserves flexibility in how proceeds are ultimately reinvested. These can be expensive to set up, though, so you'd want to make sure the juice is worth the squeeze.
How these various strategies interact with a multi-member LLC will depend on your LLC's operating agreement, state law, and other considerations. (For example, suppose you executed a 721 UPREIT exchange: would your LLC allow the other member to "buy out" the value of their shares before dissolving the entity?) It's impossible to tell without knowing a lot more detail and having an attorney's input.
I hope the above provides food for thought. Again, this post is for educational purposes only and does not constitute advice. Here are some key players I'd recommend having on your team before making a final decision on the best path forward for you:
* Your financial advisor - ideally a fiduciary, fee-only CFP Professional who works with real estate investors
* Your CPA - ideally real estate-savvy
* A Qualified Intermediary (to help you assess whether a 1031 might make sense; again, there are more passive 1031-eligible options)
* An attorney - ideally, one who can help advise on different kinds of trusts and the implications for each
Cheers!
- Rental Property Investor · Bridgeport ct · Member since 2017 · 73 posts · 22 votes2y
Thanks guys for the insight. I will be speaking with someone about it. And Dillon thank you for your input and amount of info. That’s definitely above my pay grade. Thank you again
- 2ySean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes@Basit Siddiqi is right in this case.
Quote from @Basit Siddiqi:
first need to identify if the transfer to the LLC was a contribution or a sale.
First need to get the partnership return done first before you can do your individual return and calculate the gain if any. - 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Quote from @David M.:
You do realize that pulling money out of the LLC's bank account doesn't trigger tax, by itself? The tax liability is starts with the LLC's partnership return, the 1065 if I recall, and then "passed through' to your personal return. Then, you figure out the tax.
Not sure what you mean by "refinanced an investment house into a two partner llc."
It potentially can depending on what the partner's basis is in the partnership.
If someone has a basis of $50,000 in their ownership in the LLC and take a $60,000 distribution, the $10,000 difference may be considered taxable.Basit Siddiqi CPA4.979 Reviews - 2yJulio GonzalezPro MemberSpecialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
@Ricardo Diaz
Do you have a CPA that specializes in real estate taxation? Real estate has so many tax benefits and credits available, that I always tell people it's crucial to have a CPA that's extremely knowledgeable in this area. This would be an excellent question for them. I have worked with a number of great CPAs over the years and would be more than happy to provide you with recommendations if you'd like?
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