taxes on LLC - Posted by Heeran

Posted by JHyre in Ohio on July 24, 2002 at 06:41:02:

  1. Yes.
  2. & 3) Depends upon how first L/O in sandwich is structured…if “benefits & burdens” passed to Heeron, then he is “owner” for tax purposes…getting LT cap rates & depreciation. I assumed that to be the case without explaining, because that’s how I’d structure the thing…so thanks for keeping me honest. If it’s not the case, then no LTCG and no depreciation.
  3. Yes, assuming that the option is not viewed as “dealer” property.

Good post, as always.

John Hyre

taxes on LLC - Posted by Heeran

Posted by Heeran on July 08, 2002 at 12:21:05:

If i lease a house with option to purchase from the seller at a future date and then rent it out to a tenant/buyer with the option to purchase from me at a future date, how will I be taxed on all of the income generated including (monthly rental income, Option payment, profit from the sale of the sandwich deal) if my business entity is an LLC. I am planning on holding the property for about 4 years and giving the tenant within 2 years to excercise their option. Would I have to pay ordinary and selfemployment taxes on all the profits and income or just ordinary taxes. Thanks.

Re: taxes on LLC - Posted by JHyre in Ohio

Posted by JHyre in Ohio on July 09, 2002 at 08:11:46:

Depends on all the facts- how the agreement is drafted and the liklihood of option exercise matter. The aggressive stance: Treat the thing as a rental, take the depreciation, pay at ordinary rates on the rental income, pay capital gains taxes on the option consideration when the option expires or is exercised and sell at cap gains rates, no social security taxes paid at any time. Whether or not you can take that position depends on your pattern of investing or selling, and how (un)clear your intent to sell is in this case. The more this looks like a sale, as opposed to a rental with an option to attract better tenants, the more likely you pay ordinary taxes and social security taxes, instead of just capital gains.

John Hyre

Re: taxes on LLC - Posted by Dave T

Posted by Dave T on July 21, 2002 at 22:46:07:


The aggressive stance: Treat the thing as a rental, take the depreciation, pay at ordinary rates on the rental income, pay capital gains taxes on the option consideration when the option expires or is exercised and sell at cap gains rates, no social security taxes paid at any time

John,

I agree that there are not enough facts presented to give a definitive answer. However, Heeron did say that he wanted to keep the property for about 4 years, but only give his tenant-buyer a two year lease-option in a sandwich deal.

My asumption here is that he obtained a four year lease option, and by giving his T/B only a two year option, hopes that either his first or his second tenant-buyer will exercise and cash out his position.

Now I am struggling with some questions related to this scenario.

  1. If we assume that his T/B’s option is exercised and forces Heeron to exercise his option with the original seller, aren’t option monies involved in the deal included in the purchase price and therefore taxed as part of the profit on the sale?

  2. If Heeron exercises his option, then turns around and sells the property to his T/B the next day, isn’t Heeron’s profit on the sale (the back-end) taxed as ordinary income (i.e., short term capital gain) rather than the more favorable long term capital gain implied in your comment (after all, Heeron’s holding period is only one day)?

  3. Since Heeron only owned the property for one day before selling to his T/B, wouldn’t any depreciation taken be disallowed under the dealer disposition rules? If Heeron’s only asset in this scenario is the option he owns, I do not see how he can take depreciation for the underlying property before he exercises his option with his seller. Could you explain this to me?

  4. Wouldn’t Heeron decrease his tax liability by selling his option to his T/B? For example, Heeron could accept the amount of the potential back-end profit as his sale price for his option with the original seller. Now, as long as he held his option position at least one year, Heeron’s profit (the back-end) on the sale of his option is taxable as a long term capital gain.

Dave T