Not sure where to post this so I appologize in advance. I am an accountant and I have a client who built 2 houses with a partner. they got construction loans and paid for some expenses that were beyond the scope of those loans. They did keep very good records. 2 weeks before they sold the homes they formed n LLC then did Quit Cliam to transfer from their name to the LLC then closed as the LLC. The profit will be small, but does anyone know how this would go down on the LLC and their personal taxes.
It appears that your client “contributed” his basis in the property to the partnership. When the partnership sells the property, any profit due to the partner will pass through to his personal 1040 as ordinary income.
In the absence of the partnership, your client would be a sole proprietor in this transaction. The profit would be self-employment income and taxed as such on his Schedule C and Schedule SE.
If the character of the income is the same with or without the partnership, then yourr client’s partnership share would also be self-employment income.
they each contributed the homes basis to the LLC according to whatever their respective “partnership” interest was.
they also contributed the value of whatever repairs were made to the houses.
thus the houses are carried at cost plus repairs.
you’ll need to record any mortgages on the LLC books, too (they contributed “net” value)
they will be members of the LLC at whatever proportions the management agreement specifies, which may or may not be equal to the respective amounts of their contributions. (even if partner 1 contributed 100k and partner 2 50k, they can still be 50/50 on the income split)
so when the houses sell, after everything is paid off, selling expenses booked, you will be left with some small income, which is passed thru as ordinary income to the members, according to the membership %. taxed as ordinary partnership income, subject to SE.
when final cash is distributed, the balance sheet should be zero. close the LLC’s books.
Thank you for your replies. Mark, I have to admit I have only been at this a few years now and this is the first time I have had this situation. For this particular project they had not done any financial statements either as SoleP. or LLC and they would like to have a balance sheet and P&L. Could you explain how this would work. Will they need 2 sets of financials? ( one as solep, and anaother as an LLC) or can it all be combined to one since either way what little profit there was will be on their personal 1040 (K-1 I believe I would prepare for them) And if it has to be done seperatly how would the balance sheet for the LLC look?
I hope these questions are clear, I am confusing myself writing it out. The client has another retail business now that is your standard DR/CR he just dumped this on me Thursday and I wanted to get the proper answers for him before went to far with it.
Sounds like the only thing they accomplished was to generate more fees for you.
If they insisted on financials, I would pull everything relating to these two houses off of their Sch C and run a complete set of books for the LLC treating everything they paid as a capital cont. run it through to the sale and close it out back to their 1040.
And charge them through the nose. But that’s me. And I’m really busy. And crabby.