Posted by John K Haslach, CPA, MST on April 04, 2005 at 17:43:24:
Drop me an email. Especially this time of year, it can be hard to track me down. Drop me an email.
Rental property Loss on LLC - Posted by tienchihwang
Posted by tienchihwang on April 01, 2005 at 12:59:51:
Hi,
Can we list the rental property loss in LLC as a tax deductable item in personal income tax?
The second question is if the LLC is owned by two partners, how to report the LLC Income/Loss on individual income tax? (Based on share percentage or anything else)
Any suggestion will be greatly appreicated.
Tien-Chih Wang
Re: Rental property Loss on LLC - Posted by Frank Chin
Posted by Frank Chin on April 01, 2005 at 13:08:37:
Tien:
I presume the LLC is reporting its income as a partnership.
If so, you’ll complete form 1065 for the partnership, and then use form K-1 to allocate to the personal returns.
Go to the IRS Website to obtains information on form 1065, and form K-1.
As a side note, when I started Real Estate, I got a CPA to do the taxes, and then later on, did it on my own after I learned a bit. It’ll probably be worth your while to spend a few dollars.
Frank Chin
Re: Rental property Loss on LLC - Posted by tienchihwang
Posted by tienchihwang on April 01, 2005 at 13:25:14:
Thanks for the prompt response.
Is there any maximum amount limitation for loss allocated to K-1?
Tien-Chih Wang
Re: Rental property Loss on LLC - Posted by Frank Chin
Posted by Frank Chin on April 01, 2005 at 14:50:19:
Tien:
Use the K-1 to allocate your portion of the losses if any to the 1040. You’ll be subject to “passive activity loss limitations” based on your own personal tax situation.
If you plan to use a CPA, make sure you find one that has clients doing real estate.
I would spend a few hundred dollars to have a CPA to get you started, and then follow his logic if you want to save money later on, as I did. Message boards are great to gain an insight to ask CPA’s the right questions.
While trying to do a 1031 exchange some time back, I got great info on this board, and was able to interview attorneys and found out who knew tax free exchanges and who doesn’t.
I own property with a partner, but not thru an LLC, and we simply do the allocation on our schedule E. We done our taxes on and off with CPA’s, and without, and they have no problems with it.
Frank Chin
Re: Rental property Loss on LLC - Posted by John K Haslach, CPA, MST
Posted by John K Haslach, CPA, MST on April 02, 2005 at 14:04:59:
A good CPA isn’t someone who just preparer your tax returns, he is a consultant who helps guide you through the complex maze of tax laws. Using a good one will save you many times what you spend in accounting fees. If you think you get better advice here, remember, you get what you pay for. This tax stuff isn’t simple!
Re: Rental property Loss on LLC - Posted by Congia
Posted by Congia on April 27, 2005 at 18:40:15:
Dear Frank or John,
I just read your column. I am very new to real estate and learning about forming LLC. My question is after forming LLC for a rental property with negative monthly cashflow. Can I claim loss after each year end for tax or I only can claim loss or income after selling the property? There are more than one investor in the LLC. Appreciate very much for your advice.
Thanks,
cg
Re: Rental property Loss on LLC - Posted by Frank Chin
Posted by Frank Chin on April 03, 2005 at 08:02:14:
John:
I’m sure finding the right CPA, with the right knowledge, with the right staffing level, and the right point of his life cycle is probably the most challenging issues faced by someone in the quest for a CPA.
So, my CPA adventures.
I first needed a CPA after a company I worked for relocated me from NYC to NJ. I was told that instead of using something like H&R block, find a good CPA you can rely on year after year. I visited a CPA with an office located on a main street in the next town, spoke with him for a while, and liked the fact he was in the business for a while. The one negative was there were unkempt piles of papers everywhere.
This was late January, and since we had the W2’s, the paperwork prepared, we bought it over. As we always overpay our taxes, we figured we?d get in early and get the refund in March as usual. We figured its not too complicated as we sold a condo we lived in, and bought a house. Just as a point of reference, we paid 66K for a condo to live in 1980, sold it a year later in 1981 for 80K, and bought a SFH to live in for mere 75K.
Feb and Mar went by, we called and he indicated he?d try to get the taxes done by Apr 15. Then, on the night of Apr 14, he called to say he couldn’t get to it, and he’ll file an extension. What could we do at this point, so we said OK.
Apr and May came and went. Finally, the wife said, “Why don’t I get the IRS publications and see what we could do”. No big deal, as we always done our taxes before this.
The wife worked several weekends on it, trying out all different ways, and cheerfully announced that we’ll get a refund after all. With the tax laws in effect at the time, taxes are deferred on the sale of a personal home if the new home cost more. But there is a tax due if the new home cost less, and in this case, of 5K, the difference between the price of the new home, 75K, and the sales price of the old home 80k. Because of this, I figured, we couldn’t really get a refund. I asked her, “How did you manage to compute a refund”?
She explained that after reading the publications, and because its a relocation, we can add in the selling expenses on the old home, the buying expense on the new home, and the moving expenses etc. because we exceeded so many miles in the transfer. So she wiped out whatever taxes arising from the sale of the homes.
June rolled around and then July, and the CPA called to say our taxes are ready, and we were shocked to see we owe a little under 2K on his return. After reviewing his work, we made appointment to compare our tax return to his, and go thru the sale of the home, the transfer etc. The job transfer and the sale of the home was the reason we hired a CPA in the first place.
Long and short of the meeting was he concluded we did everything right. Asked why our way showed a refund of over $1,000, and his way shows a tax due of almost $2,000, his answer was “I have a lot of clients and I can’t try every variation possible to minimize the taxes”. And HE GOT PAID after he agreed to copy our return. We complained a bit, and he added, ?Most of my clients don?t study IRA publications?.
So we asked around to get names for another CPA, and as my wife worked as a banker at the time, a coworker who once owned a business mentioned that he thought his CPA was a wiz. We interviewed him, and went ahead, and this time we were also pleased he moved from a one-room office on 7th and 49th to a large suite on 23rd street off Six Avenue. I used him for about eight or so years. The strange thing about this CPA was when I visited him for consultations other than tax time, lets say October, he?s the only one there in a large suite, dead quiet, as compared to a frenzied staff of six or more in April.
Then a few years back, this fellow notified his clients that he finally quit the tax business, and went into another. Since we kept ourselves up to date on tax laws, we decided to do things ourselves, and take our time finding the next CPA.
Finally, we decided to restructure our Real Estate portfolio, and interviewed CPA?s again. I was busy; my wife did the search, and mentioned she liked a solo practitioner in the neighborhood. She bought me over, but in the course of the interview, he gave some incorrect answers on issues like capital gains. So I told him I?ll use him on a project basis meaning I?ve have him compute gains on the sale of a property, pay him a fee to do this, and if we decide later to have him to the taxes, we?ll do so. So I double-checked his calculations, it was correct, and I had him do my personal taxes as well.
Two years later, I bought an active business. I gave the matter some thought, and decided I might need a larger firm. I met the CPA for the seller of the business, and I was impressed that it was a father and son CPA, with a staff of ten assisting. So he does taxes for my active business organized as an LLC, my rental properties, and my personal taxes. I told him I couldn?t afford to pay another $600.00 each for him to do my ?S Corp?, and ?C Corp?. So I do them myself investing about $175.00/year on Turbo Tax.
I was busy the first year I used this new (fourth) CPA and I checked his numbers for the LLC only. The second year, I reviewed the numbers for the rental properties, and I told him he had it all wrong. He asked me what was wrong.
I told him that the I noticed that I found it strange that assets I bought in the 1980?s, fully depreciated in the 90?s, is depreciated again. I told him that in reviewing the schedules, he does not have a column for ?prior depreciation?, and since he doesn?t have that, I can?t tell if he did it correctly. So he told me ?give me the ?prior depreciation for all the assets?. Now, there were hundreds of assets.
We filed an extension in April, and then June July and Aug 1 rolled around. I was a bit embarrassed to ask my ?third? CPA I?m not using to furnish me the depreciation figures for the 4th CPA. But the 3rd CPA was nice and he was kind enough to oblige but asked to see the work the 4th CPA, and I was in for a little shock.
My 3rd CPA said that obviously the depreciation on the old assets was all-wrong. But because I also added new assets, he said he couldn?t find ?bonus depreciation? that I was qualified for them, and added that in as well.
At this point, I ask the ?third? CPA what?s involved in completing my tax returns as he did the work on my rentals. He said he was 75% done, as I got the K-1?s from the business done by the new (fourth) CPA. I told him to get in and done by Aug 15. One other big reason was my 4th CPA? was on vacation from Aug 1 on and I called the son to ask what I should do, and the answer ?How can I tell you anything on a return I didn?t work on?.
Well, papa CPA came back from vacation and asked why I haven?t paid his fee for the tax return. I explained he was on vacation, the one I got was all wrong, and his son was well ?rude?
His response??
He fired me as a client in these words ?I don?t like people such as you as a client?. He said he?d sue me for the fee on the tax returns. He sent me a bill for stuff that he said was done as a favor for me when I was a client that he wants to get paid. Unfortunately for him, he kept bad books, and lot of the stuff was paid. I wrote him a letter with the cancelled checks.
So I?m back to my third CPA. He offered to do my ?C Corp? for $225.00 when he noticed it was a simple return, and he felt sorry for me. I said OK as Turbo tax, Federal, State, and City cost $175.00.
The one thing that worries me is he?s a one-man shop. Asked him what will happen if he gets sick around April 15, and he said he has a brother who?s also CPA who can help. But his brother works for a larger CPA firm.
As I said, I used CPA?s on and off, and it?s not for the lack of trying.
Frank Chin
Re: Rental property Loss on LLC - Posted by John K Haslach, CPA, MST
Posted by John K Haslach, CPA, MST on April 03, 2005 at 09:43:15:
Sorry you have had such horrible experiences. I am in NJ if you are interested in giving me a call. 732-566-2849.
Re: Rental property Loss on LLC - Posted by Frank Chin
Posted by Frank Chin on April 04, 2005 at 17:24:31:
John:
Thanks for letting me vent.
Called you in the AM, and a young lady answered “Hewitt”, but couldn’t direct me to you.
Called in the PM, and a gentlemen knew who you are but said you’re hard to track down, but he’ll try. I said thanks, “I got his e-mail address”. He replied “I think that’s the best way”.
Appreciate your comments, and we can correspond off board. Again, thanks.
Frank Chin