All Forum Posts by: Michael Lynch

@Brighten Miller Unfortunately, that does not seem right to me. I do not see how you were using the house as a business (rental) asset, and that is a requirement for §1031. There may be an argument that this is investment property for you, but that seems like a long-shot and would warrant research.

If you are able to substantiate that this property is an investment property for you, there is another issue. There are revenue rulings about whether or not a remainderman interest is like-kind to other interest types. Again, would warrant research.

As an aside, since there are life estate and remainderman interests, are you sure each of you have one-third of the basis? And, are entitled to one-third of the proceeds? Usually time discounted calculations need to be made.

@Mindy Jensen Ordinarily, there should be a step-up in basis. But, watch the paperwork!

The property is eligible for a step-up if it did, in fact, go through the estate. In this context, to go "through the estate" for a full step-up, the property had to be held by your client's mother outright (or possibly in a revocable trust).

When an heir is referring to the property as their "grandmother's" when they inherited if from their mother's estate, it is worth checking the ownership carefully. Make sure, for example, that the grandmother did not leave it to your client with your client's mother having only a life estate, or that the property was not gifted to the client rather than inherited.

(I had a client come in the other day whose grandparents gifted their home to their daughter/client's mother, who in turn gifted the property to my client. Her basis goes all the way back to what the grandparents originally paid for the home!)

If the mother was married, make sure there is not a former spouse that left their interest (if any) to a bypass trust, etc.

How to be sure? One way it to look at the property's chain of title--any gift deeds or deeds that transfer ownership to a trust?

Consider advising your client to contact a CPA or attorney that works in this area.

This definitely becomes more complicated. If you are simply distributing the net taxable income from the LLC which is only operating rental properties, the income would not be subject to FICA tax. If the income is negative, you may be subject to the passive activity rules--seems quite possible given that you are over the FICA limit. I believe you would be best served by developing realistic projection numbers and then checking out your tax situation and possible ways to handle the LLC.

Just a clarification:

Sole Proprietorships do not file a separate income tax return. Income is reported on the appropriate schedule (usually C or E) of the owner's Form 1040.

Partnerships DO file an annual report of income on Form 1065. Form 1065 in turn reports taxable amounts to the partners for inclusion on their income tax return.

S Corporations, tax-wise, are similar to partnerships, but there are some important differences.

Limited Liability Companies are also similar to partnerships, but, again, with differences. However, if the LLC has only one owner, it can elect to be a disregarded entity for tax purposes. In such case, it is taxed like a sole proprietorship. (Just to add confusion: LLCs can also elect to be taxed as a corporation or an S corporation.)

Some states have laws that are different than federal law. The most common difference is that the state will impose some tax or fee on pass-through entities where the federal government does not.

Many business organizations are required to have the same fiscal year as their owner(s) have or to basically have a deposit with the IRS to compensate for timing differences.

https://www.irs.gov/businesses/small-businesses-se...

https://www.sba.gov/business-guide/launch/choose-b...

Cash flow is not the same thing as taxable income. You hit on one of the differences: the payment of principal on a loan. While this is a negative amount for cash flow, it is not a tax deduction.

The other common item is depreciation. When you buy capital assets, you (usually) cannot immediately deduct their costs. Instead, you depreciate these costs over time. So, for cash flow purposes, you have an outgo when you purchase the assets and no outgo in future years. But, for income tax purposes, you have no deduction for original cost of the item, but you do have a deduction over time for depreciation.

@Ami Sapir, mathematically, it is better to find a credit card with a lower rate or to take out a HELOC to pay off your consumer debt. That will literally save you money--potentially a lot of money.

However, it is worth considering why you are reluctant to do this. If there is any chance that you will just run-up a new load of charges on the paid-off cards, don't refi them. I have seen this happen more than once. Pay them off like you plan to if this is a risk for you.