All Forum Posts by: Margaret Feit

Thank you both for your replies. As @Eamonn McElroy pointed out, I did post an awful lot of questions in one post. Sorry for that! I would love to ask my CPA about all this, but since I do my own taxes, I have so far been unable to find a CPA who is willing to work with me at a reasonable price point just to answer occasional questions, so I don't know who to call with these sorts of questions. If either of you would be willing to pitch in on one follow-up question, I would greatly appreciate it. 

I don't foresee this property ever turning an income, and we are thinking at this point that we will have to end up selling it at a substantial loss in the next year or two. (Hear the frustrated disappointment in that statement...!) At whatever point we are able to claim the losses on our federal return, either through the sale of the property or by receiving passive income elsewhere, will we be able to claim these losses on our GA tax return against our GA income, or do we never get to claim a state tax loss on them if we never have income in KS?

Thank you!

My husband and I have an LLC (taxed as partnership) located and registered in GA (where we live), which had an overall net loss for 2018. We also have a subsidiary SMLLC (owned by the partnership) that is registered in KS and owns a commercial property there. That subsidiary LLC also had a net loss for 2018. Does the partnership need to file a state return in KS for 2018? If so, it will be the parent company filing the return, since the subsidiary is a disregarded entity. Will it pose any problem for the parent company to file a state return there if it is not registered with the KS Secretary of State?

All the losses ultimately flow through to our personal joint return, but we will not be able to claim any of them in 2018 because of passive loss restrictions. If the answer to the above question for the partnership is yes, then do I also need to file a KS personal return, just to report losses that I cannot claim for this year? 

When I do eventually get to claim these passive losses, can I only claim KS losses at the state level against other KS income? Or if I have passive income in GA in the future, can I claim my previous KS losses on my future GA return? What happens if I eventually sell the KS property at a loss and never realize a gain there, while at the same time selling a GA property with a capital gain? On the state returns, can I claim the KS capital loss on my GA return to offset the GA capital gain? I understand how all this works at the federal level, but the inter-state details are a little more murky for me! Any help is appreciated! Thank you!

@Dave Foster, Yes, the 1031 issue is what brought me into realizing this may turn into a problem! The business is an LLC taxed as a partnership. The partners are my husband and myself, and we file a joint return for our 1040. So on the 1065 everything gets divided into K1s for my husband and myself, which are then both reported on the same 1040. In the end it doesn't change the amount of tax due or who owes it, because it all ultimately gets paid through our joint 1040.

But yes, from a 1031 standpoint, we could run into an issue if the property is owned by the partnership and we want to buy something new with a mortgage, which would be our likely scenario. It's making me wonder if maybe we should just figure out how to change the MMLLC to a SMLLC somehow, if that's even possible, so that we're not messing with the complications of two different tax returns. Not that that's necessarily an easy process, but would that essentially solve my problem?

@Nicholas Aiola What did you recommend for your clients in the situation in your last paragraph? Go back and redo their books and separate it all out? Is there a way to separate it moving forward without re-filing old tax returns or re-entering several years worth of transactions in QB?

The CPA did know how the properties were titled. In his defense, I will say that I think I had started it that way a year or two before, and then when I asked him about it, he said it probably didn't matter to continue it that way, since it didn't make any difference on the amount of taxes we owed. It wasn't his idea in the first place, though.

All that said, now that this is my setup, I'm trying to figure out how to move forward. Changing the properties into the name of the business isn't really an option, because quite a few of them have mortgages on them, and my experience so far with quit-claiming is that it just makes everything complicated with insurance, with potentially wanting to refinance or 1031 down the road, and besides that the local small bank that has several of my mortgages has no interest in accommodating this arrangement. 

I know there is a lot of debate about liability with LLC structuring vs. insurance, and I know the different sides of that argument. At this point most of my properties are titled in my name and mortgaged, so in all honesty I don't see a reasonable and cost-effective way to separate the liabilities with different LLCs. So I recognize that at this point the liability protection of my LLC is essentially shot, and I have a good personal umbrella policy instead.

So at this point, what purpose does my LLC even serve? Maybe nothing, except that it gives me a way within my own accounting to separate my real estate from my other business and personal accounting, and it gives me professional credibility as a business owner, with a bank account, credit card, tax ID#, etc to have my real estate set up as a business.

One option I've considered is somehow removing myself from the partnership and letting my husband continue the LLC taxed as a sole proprietorship, so then it all flows to our personal tax return anyway. But I'm assuming that process is much more complex than just declaring that it's no longer a partnership!

I'm under contract right now to purchase another property (in my name with a mortgage) in a few weeks. And I'm planning in 2019 to sell another property and do a 1031 with it. I want to figure out a plan for myself before I move forward on either of these new items, but feeling a little lost in how to move forward!

Yes, they are on the balance sheet. From an accounting perspective, everything is handled through the business. It is only the title of the property, mortgage and insurance that are in our name because that's what the bank required. But in Quickbooks and tax returns, everything is recorded as if it is owned and managed by the business.

My husband and I are members in an LLC partnership that owns several rental properties. We also have a handful of properties that are titled in our personal names because we have mortgages on them that had to be in our names. We do the accounting for all the properties as part of the business. They are all under one Quickbooks file. The LLC receives all the rents in its checking account and also pays all expenses, including the mortgages that are in our personal names. So far we have been reporting all the income and expenses on our partnership 1065 tax return, rather than filing a schedule E on our personal return. The CPA we worked with last year told us that this was a fine practice, as long as we are accounting for and reporting everything and paying all the taxes we owe (we are), that it is okay to report it all on the partnership return where we are actually running the accounting, rather than dividing the properties up between the 1065 and the 1040 according to the name on the property titles. Since the partnership is a pass-through entity, it doesn't make any difference in the amount of tax that we owe - just keeps the accounting simpler to do it all in one place. But before we continue any further with this practice, I wanted to ask the community whether anyone else has experience with this, and whether this arrangement could potentially get us into trouble down the road. I know there are liability ramifications with the way the properties are titled, but in this case my question is really about the tax reporting between the two returns and not the division of liability. Thank you!