Rental Property bought personally before LLC organized

[NECPA in NEBRASKA]

Commercial Rental Building was purchased personally by two married couples that intended to put it in an LLC. Unfortunately, the LLC was not organized for two months and the mortgage is in the names of all four owners. They didn't know that it was anything important until I started working on the 1065 and found that nothing was in the LLC's name. I've done a little research and it appears that it may be up to the bank as to whether they are allowed to transfer it into the LLC  at this point. I told them to call the bank and the attorney. At this point, I think that each couple will have a Schedule E for 2019. It is not a community property state. They are all related if that might make any difference. I'm just looking for some reassurance that I am correct in showing half of everything on each joint return. 

I am now going to go back to an easy return, because everything that I have touched for the last week has had crazy issues like this.

Thanks!

 

[ILLMAS]

I have seen many LLC prepared by attorneys and non-attorneys after the fact and the loan is under the owner name, not the LLC.  Does the IRS care?  I don’t know, but some would be happy to say, the IRS doesn’t care how it’s reported, just as long as it is reported.

[Abby Normal]

Tax-wise, the IRS may not care. It's a 1065 either way.

Legal-wise, I would want that building titled in the LLC's name.

[Lee B]

54 minutes ago, Abby Normal said:

Tax-wise, the IRS may not care. It's a 1065 either way.

Legal-wise, I would want that building titled in the LLC's name.

Exactly, years ago I picked up some new clients who included 3 brothers who jointly owned some commercial rental property.

The CPA who had previously prepared the returns had treated the situation as a joint venture reported on the Schedule E of each brother.

I followed the joint venture approach for several years, until the IRS sent  my clients a letter forcing them to file a Form 1065.

[Randall]

This happens a lot.  The client doesn't have a clue.  Not a problem if there is no loan.  But with a loan, I would think the bank would have to have a new loan processed. They're probably not going to want to do that.  If there are partners, they should get this titled correctly and the loan too.  

[NECPA in NEBRASKA]

3 hours ago, cbslee said:

Exactly, years ago I picked up some new clients who included 3 brothers who jointly owned some commercial rental property.

The CPA who had previously prepared the returns had treated the situation as a joint venture reported on the Schedule E of each brother.

I followed the joint venture approach for several years, until the IRS sent  my clients a letter forcing them to file a Form 1065.

These guys were doing this previously with some other property. I definitely want to prepare the 1065 if I can and not have to mess around with Schedule Es and then transferring it to a 1065. There is definitely a mortgage and they have called the bank. Thanks to everyone for their help.

[Sara EA]

The IRS will go with substance over form, so I don't think it cares.  I wonder about the banks though.  I've had several clients who quit claimed their mortgaged homes to their kids.  One would think the lender banks would care very much if the home was given away.  I guess the parents never told the bank and as long as they continued to pay the mortgage no one was the wiser.

[DANRVAN]

On 5/18/2020 at 7:26 PM, NECPA in NEBRASKA said:

At this point, I think that each couple will have a Schedule E for 2019

That sound right if the property is held outside of the partnership.  Any 1099's received?

[NECPA in NEBRASKA]

3 hours ago, DANRVAN said:

That sound right if the property is held outside of the partnership.  Any 1099's received?

The 1099 received was to the LLC. The bank is going to add the LLC to the mortgage as the DBA. They are going to help them with doing the deeds. 

[DANRVAN]

21 hours ago, NECPA in NEBRASKA said:

The 1099 received was to the LLC.

In that case I would consider filing form 1065.  In a similar situation,  I worked with the attorney to back date the effective date of capital contributions.