All Forum Posts by: Account Closed

You never step in and assume the assets and liabilities of a business.  It is a disaster waiting to happen.

If you are serious about this, create a new legal entity and purchase the assets of the business, including the name, goodwill, and the "value of the ongoing business."

Make sure to notify everyone that you have had business relationships with with for the prior two years that you need to re-establish those relationships because you are not the same as the previous owner.  If there is a problem, this is where it will show up.

This is probably not something you should be doing on your own.

Good Luck.

How are you "creating" your team?

Are you just making a list and contacting them for future reference, or are you talking about retainers and contracts for services?

It makes a difference.

You need to look at some more numbers here.

How much did you pay for the property?  What portion was assigned to land?  How much depreciation did you claim?  What is your depreciated basis?  How much are you selling the property for?  What are your transaction costs?  Was any of your depreciation other than straight-line?

0% Capital Gains is rare in a good real estate market.

Are you saying that you believe that "the tax treatment for single member llc's would still allow us to take the $250,000 capital gains exemption if we sold a couple of years down the road" means that you can live in property owned by your LLC and get the exemption allow by Section 121 for sellers of a primary residence?

Please, I am not suggesting or advising.  Just providing information for your consideration.

"Live-in-then-rent" is an excellent strategy.

But the strategy is that you will avoid all capital gains taxes by first living in the property long enough to qualify for the Section 121 exclusion.

Here's how you do it.

1.)  Buy the property in your own name.

2.)  Live in it for at least two years.  This qualifies you for the Section 121 Exclusion of all capital gains taxes when you sell the property, provided you do it within five years after you buy it.

3.)  You move out, keeping it in your own name, and rent it for three years.

4.)  Before the end of five years from the time you bought it, you sell it.

5.)  You will pay zero capital gains tax because under Section 121 you owned and lived in the property for two of the prior five years, even though it continued to go up in value during the three years that it was a rental.

6.)  You will pay a 25% Depreciation Recapture Tax on the depreciation that you claimed during the three years that you rented the property, but not on the capital gains which accrued during that time.

7.) Yes, during the three year rental period you will be without the protection against personal liability provided by having the property owned by a Limited Liability Company (LLC) which you own.

8.)  However, you can create another legal entity which you own and have that legal entity purchase the property when you sell it after five years, and you will continue to enjoy it as a real estate investment.  You could even sell it to the entity after the two years of qualifying for the Section 121 exclusion, but there is usually not that much appreciation in the first two years.

I have a chapter about Section 121 and Section 1031 in my book, as well as on my site.

Let me know if you have any questions.

Michael Lantrip

What reason do you have for having your LLC purchase the property if it will not be used as a rental property? You have no need to protect yourself against personal liability.

What reason do you have for living in a house as your primary residence that you do not own, and therefore giving up the absolute exclusion of taxable gain available with Section 121 after two years?

You can do what you propose, I guess I just don't understand why.

So, now you say that you don't own the property. The property is owned by an LLC.

You want to know about buying half of the membership interest in the LLC that you don't already own.

I'm sorry, but that is not the question you asked.

That requires looking at your Operating Agreement and a number of other documents.

Disregard what I have previously written.

Sorry, I was managing an unruly crowd.

Here are the numbers.

1.)  You paid $150,000 for the property.

2.)  You assigned $38,000 value to the land.

3.)  You put the building on your Depreciation Schedule at $112,000.

4.)  You have claimed $25,000 in depreciation.

5.)  Your total cost of acquisition is $150,000.

6.)  Each of you began by owning a 1/2 interest worth $75,000.

7.)  You now have a Depreciated Basis of $125,000.

8.)  This is a Depreciated Basis of $62,500 for each of you.

9.)  Your Partner is selling his 1/2 to you for $120,000.

10.)  He will have a Capital Gains of $57,500.

11.)  The first $12,500 of this will be Depreciation Recapture.

12.)  The remaining 45,000 will be Capital Gains.

13.)  You are paying $120,000 for his 1/2 so that you will own 100%.

14.)  Your new Basis will be the $75,000 that you originally paid for 1/2 plus the $120,000 you are now paying for the other half, a total of $195,000.

15.)  Your Depreciated Basis will be $182,500 which is the $195,000 that you have put in less the $12,500 depreciation you have claimed.

16.)  You will continue to depreciate the first 1/2 that you purchased on the Depreciation Schedule that you now have.

17.)  You will create a new Depreciation Schedule for the 1/2 that you are now purchasing, using the $120,000 price less $19,000 assigned to the land.

I think I covered everything there.

Sorry for the misunderstanding, but that is often how it is when you are doing tax accounting.

I hope this helps.

Michael Lantrip

Are you saying that you paid $150,000 and assigned $38,000 to the value of the land, leaving $112,000 for the value of the building, the amount to be depreciated?

If so, substitute this number for $262,000 in my analysis, and run the numbers.  

Let me know if you want me to do it.

Be glad to.

Michael

Let's run the numbers.

1.)  You paid $150,000 for the property.

2.)  You spent $112,000 for improvements.

3.)  Your total cost of acquisition is $262,000.

4.)  Each of you began by owning a 1/2 interest worth $131,000.

5.)  You have claimed depreciation of $25,000.

6.)  You have a Depreciated Basis of $237,000.

7.)  This is a Depreciated Basis of $118,500 for each of you.

8.)  Your Partner is selling his 1/2 to you for $120,000.

9.)  He will have a Capital Gains of $1,500.

10.)  The IRS requires that the first dollar be treated as Depreciation Recapture, and each dollar after that until all of the Partner's 1/2 of the Depreciation is accounted for.

11.)  Therefore, his $1,500 of Capital Gains will be taxed at 25% as Depreciation Recapture.

12.)  Now, you are paying him $120,000 for his 1/2 so that you will own 100%.

13.)  Add the $120,000 to what you already have as a Depreciated Basis and you have $238,500 as your new Depreciated Basis in the property.

14.)  You have already claimed $12,500 in depreciation, and you will have to pay the tax on this amount when you sell, as well as any additional depreciation that you claim after you acquire total ownership.

15.)  You will continue using the Depreciation Schedule that you are now using for the 1/2 that you already own.

16.)  You will create a new Depreciation Schedule for the 1/2 that you are acquiring.

I ran through this pretty fast, so some of my numbers might be off, but don't worry because someone will probably be on here shortly trying to get her friends to jump on here and attack my answer, and we'll find the mistakes.

I hope this helps.

Good Luck.

Michael Lantrip