All Forum Posts by: Keith Barton

If it is something pretty straight forward, as described in IRS Publications, as an established industry practice, etc... then that's how you should do it. This is not that. Ultimately what matters is the value of the building - if you have enough to support/justify your treatment of the amount at issue - go with that. When it is something that is not a simple yes/no, the IRS will decide what they decide: sometimes it will be reasonable and sometimes it won't. Then you have to decide how much it means to you (i.e., is it enough to go to court over?) In any event, as Charles mentioned - improvements of the type the original post was about, oh so many years ago, would be depreciated separately from the original cost of the building....

Paul:

Do you have a citation for the assertion you make?

Can you explain how your assertion would be different from this scenario used in IRS Publication 523?

http://www.irs.gov/publications/p523/ar02.html#en_US_2010_publink1000200763

There may be more to it than has been mentioned so far.

For example, to be a little more specific about the legal description.... Each state has laws controlling how real estate can be sold and how real estate can be transferred to a new owner (2 different things.) The requirements to transfer will definitely have something to say about the legal description. Not sure, but assuming the requirements to sell will also have something to say about the legal description.

ALSO:
What exactly do you mean by buying on contract? When is the seller transferring the deed out of his name and into your name? One comment you made could be interpreted to mean you are purchasing with a land contract. If that is the case, there are usually very specific legal requirements about that whole process, which means you would have to consult someone who can advise you about that in your state.

In General:
If you acquire any kind of ownership interest in property, you have something tangible of value. How much is tangible, and what the value are will depend on too many things to list. If you have something tangible of value, it can be transferred to someone else for value (as long as nothing has restricted your right to transfer the property.) However, the actual value of a less than fee simple absolute interest in real estate doesn't often amount to much. In addition, if anyone in the deal is relying on a bank, the bank can squash the whole thing simply by saying they require a security interest defined as X, Y, & Z: if that exact type of security interest cannot be transferred to the bank, the money doesn't get loaned. Banks are not creative when it comes to security interest. They usually want to see a fee simple absolute interest in real estate for money to be loaned.

Bienes & Jon:

Please note Bienes originally said the corporate veil cannot be pierced unless for fraud and misrepresentation (which is 1 part of the test for fraud btw). This is not inconsistent with what Jon is saying.

Assume the following #1:
I own an LLC.
The LLC owns a rental property.
I perform management functions for the LLC and the property.
I, in my capacity of working for the LLC, make a decision or perform an act that is negligent.

Tenant sues me personally for my negligence. Tenant can win and can collect against me. I can lose my personal house and assets, etc.... An LLC does not protect me from this - BUT this has NOTHING to do with piercing the corporate veil. It doesn't need to. I directly was liable for negligence. Because I was directly liable, I am on the hook.

Piercing the corporate veil means something was done improperly and the owner of the business entity should not be given the protection normally afforded to the owners of a business entity. However, in this situation - I was DIRECTLY negligent. No need to pierce anything....

Assume the following #2:
I own an LLC
The LLC owns a rental property.
The LLC employs a manager to manage the property.
The manager performs some negligent act.

Tenant sues me personally. Tenant cannot (should not) win against me. I personally did nothing wrong. Tenant sues manager. Manager was negligent, manager is liable for the negligence and is responsible to the tenant for damages. LLC is liable because the LLC owns and manages the property (or the LLC only manages the property doesn't matter for this scenario). LLC is liable also, LLC responsible to tenant for damages. I personally have no liability. My personal assets are not at risk. I might lose the rental property, but not my personal home.

The only way my personal assets would be at risk in this scenario is if the corporate veil is pierced. THIS is when I have to worry about fraud. Negligence is not enough to pierce the corporate veil normally.

Bienes was talking apples and Jon was talking oranges.

Thanks for catching that Dave.

How much do you have invested in this? This will be a nightmare to sort out, and not sure which way it would go without more info and research (which I don't have time to do....) Anyway, generally speaking - the title is a public record proof of who owns the property. There are ways to defeat that, but not sure it would work in this situation. Your remedy would be to sue your brother (to argue he should not be legal owner), or sue your step-father's estate (to argue he didn't have right to sell to you and he owes you the money - but then you didn't get title so you should've known better - and then where does this leave your mother....) - no-win situation if you ask me....

I admit I am not up on how expenses may be treated differently with regards to farm income. However...

If you have a business (whatever the structure or the entity), you can deduct expenses you incur to produce income, if the expense is reasonable and necessary, etc....

Therefore, if you buy a tractor that is used to produce income, you can deduct the expense (I know it is technically depreciation taken over a number of years, but amounts to the same thing.) If you don't use the tractor to produce income, you cannot deduct the expense.

If you purchase land to farm, what is the expense? Well, one might say the purchase price is the expense. In a sense, it is. For tax purposes, it is not. Land is not depreciable because it does not get used up and become worthless over time (like a tractor does). If some resource on the land does get used up, then you can take a deduction for depletion. For tax purposes, the only expense of the land is mortgage interest and property taxes - both of which are deductible. You recover your initial investment in the land (purchase price) when you sell it. If you realize a loss on the sale of the land it counts as a deduction for you. If you realize a gain, it is taxable.

Maybe I'm missing something, but what are you concerned about missing out on? If you lease property to use for farming, the lease price can be a deduction (I assume - too lazy to confirm right now) because you don't own the land to sell later on to recover the investment.

If you own the land and want more money now instead of later - sell it, otherwise...........

Rental real estate is always a passive activity. However, if you are designated a real estate professional, it's not considered a passive activity and you can take a deduction against ordinary income. Also, if you materially participate in the rental activity, you can take up to $25k of the passive activity loss as a deduction against ordinary income - unless, your AGI exceeds a certain threshold: $100k it starts to phase out, and at $150k it's gone.

See IRS Publication 925: http://www.irs.gov/publications/p925/index.html

Qualified leasehold improvements such as you mention are depreciable over 7 years (unless you qualify for and take accelerated depreciation or a §179 deduction.) However, there may be different tax treatment if the building is newer (3 years old or newer.) Search the term "qualified leasehold improvement" for more details. Also, if you quite the premises before the capital improvements have been fully depreciated/deducted, you can deduct the rest in the year you abandon the improvements.

One of the main goals of forming an LLC is to have protection against legal/financial liability. Piercing the corporate veil is a method by which someone can show the owner of an LLC should not be given the traditional protections. There are many reasons for disallowing the normal protections, but my point is to have the most protections, you must follow the formalities as closely as possible. If one person of the couple does most of the work in the business and the other person has a W-2 job, it might be best to put the LLC in the name of the person who is doing the work.

If you really want to get creative (both with liability protection and with tax treatment) you will have multiple entities with different agreements between the entities (e.g., assets owned by 1 or more LLCs, management company that is a corporation, limited partnership in the family that is an umbrella entity for the others, revocable trust to eliminate probate, etc....)