Informal Partnership, Now LLC

[TKTax]

Clients are brothers with jointly owned rental properties. They have had them for a few years, and have always reported their proportionate profit and loss on their separate returns. Never reported as a partnership, just a "joint venture".

Halfway through 2014, they formed an LLC. They have not moved any properties to the LLC yet. All ownership is still joint in their names. Can we file a Form 1065 for 2014 using the rental activity, even though the properties have not formally been moved?  How would we account for the first part of the year? 

Open to suggestions...

[Pacun]

I have heard that properties need to be under the LLC name but I never knew why.

 

When you form a partnership, a partner can bring a tractor and his basis on the partnership is the FMV of the tractor or the cost, whichever is less. Why not real estate?

 

So if money making items are all considered the same, you don't need to transfer the title of the Real Estate Properties to the LLC and you can depreciate them. I think the issue is that losses are not allowed even if the partners run the rental business and make breakfast to the tenants (material participation).

[kcjenkins]

The real issue is not taxes, since the income should be the same whether a joint venture partnership or LLC.  The LLC is for another level of legal protection, and for that the properties do need to belong to the LLC.  

[Pacun]

In any event, the buildings will be gone to the person who sues me whether they are under my name or the LLC's, correct?

[jklcpa]

In any event, the buildings will be gone to the person who sues me whether they are under my name or the LLC's, correct?

 

That would depend on the insurance coverage.  If someone sues an LLC in the case of a building, the liability stops with the assets of the LLC. The personal assets of the owner are protected, and that is the reason to form an LLC such as this.

 

As it was before the LLC was formed and until that building is transferred into the name of the LLC, if someone sued because of something that happened with the building, all of the owner's assets were at risk.

 

Hmm, this brings up another topic for those preparing taxes and meeting with clients at their homes.  I'm going to start a new topic for that one.

[Randall]

I have a similar situation but a little different.  Four people (one is my client) formed an LLC to rent a property.  The property is owned by one of the four (not my client).  They never transferred title of the property to the LLC.  The mortgage is in the name of the owner.  They are under the impression the LLC is conducting the rental activity.  I was thinking that the LLC is doing nothing but managing the property (collecting rent, making payments, etc.).  I was thinking that the LLC would have to give the owner a summary of activity and the owner would have to report the rental activity on his personal return.

[Pacun]

Will you think differently if property was a tractor?

[Randall]

Pacun, I would think differently if there was only one owner of the tractor who was the sole owner of the business.  But if a partner, member, shareholder owned the tractor (or other asset), and wanted the business to have it, I would think there should be some formal transfer of the asset to the business.

[easytax]

I have a similar situation but a little different.  Four people (one is my client) formed an LLC to rent a property.  The property is owned by one of the four (not my client).  They never transferred title of the property to the LLC.  The mortgage is in the name of the owner.  They are under the impression the LLC is conducting the rental activity.  I was thinking that the LLC is doing nothing but managing the property (collecting rent, making payments, etc.).  I was thinking that the LLC would have to give the owner a summary of activity and the owner would have to report the rental activity on his personal return.

Is the LLC leasing the property from the owner and then renting it? If not, then as you stated the LLC may only be acting as a rental agent (in some states need a RE license to do that -- unless your own property). If a rental agent it would make sense that the LLC would report to the owner as the owner would need to have information to report on their taxes, etc..   Which means, the owner in either case needs to report something (LLC paying lease payments, etc.  OR LLC acting as manager).

[Randall]

There are no documents other than a boiler plate Articles of Organization which is fairly useless.  Nothing stating what they are actually doing, intention of purchase, lease or anything.  Just a verbal agreement among members that the LLC (really just my client who is the managing member) will take care of the rental (collect rent, pay bills, etc).

[easytax]

I have a similar situation but a little different.  Four people (one is my client) formed an LLC to rent a property.  The property is owned by one of the four (not my client).  They never transferred title of the property to the LLC.  The mortgage is in the name of the owner.  They are under the impression the LLC is conducting the rental activity.  I was thinking that the LLC is doing nothing but managing the property (collecting rent, making payments, etc.).  I was thinking that the LLC would have to give the owner a summary of activity and the owner would have to report the rental activity on his personal return.

Correct --- the LLC details to OWNER and the owner does taxes for the property.  The LLC does their own taxes for income, expenses, etc. too but has "no interest" or mention in building, etc. as it is not theirs. LLC is just managing/agent for owner.