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Meaning of "Investment at risk", unreimbursed expenses

Several years ago I lent family members a substantial sum for the down payment on commercial rental property. They got into a cash squeeze and converted the down payment to equity in the LLC that operates the rental property. I have no role in the terms and conditions of rental contracts, the selection of tennants, -- basically they consult with me on only one aspect of the business: land use development. In that regard I am a retired but still licenced professional. I meet with land use planners, building officials, make drawings, meet with contractors and personnaly do construction work. I live some distance away so to go to the project requires travel. Because I don't make decisions about tennants Form K indicates that I am a passive investor. As a practical matter I am not passive because of my advisory role on the development as a whole... but I have no say in anything. I would like to deduct my travel expenses.. God knows I have real money at risk if they default on the land sale contract. How do I report my travel expenses?

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Reply to
Perplexed
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Most likely the activity is a passive activity.

In order to take a loss, there are three hurdles to get over. Your first hurdle is that you might be able to take a loss to the extent you have basis (through equity and debt - if partnership). Your next hurdle is that you must be "at risk" in your investment. This is pretty much the same as having basis, except your non-recourse debt is not considered basis in the entity. If you have enough basis after the basis and "at risk" hurdles, and you participate in a passive activity, you need to have passive income in order to take the passive loss. You can report your travel expenses on form SBE. However, the expenses have the same character as the income/loss from the activity (i.e. active or passive). Therefore, you need passive income in order to take SBE expenses for a passive activity. One thing to note is that your passive losses carry forward forever until you either have passive income or dispose of the activity. In the year of disposition you may deduct all of your suspended passive losses.

Reply to
JMc

I haven't taken the time to research the definition of a passive activity again but I'm am not so sure that such designation applies to the OP. I don't believe that participation necessarily means management. OP says he conducts a number of activities for this organization. Isn't this enough to say that he "participates?" Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

I'm just going on my experience. More likely than not a real estate entity is a passive entity. I believe for the real estate activity to be considered active, you must perform more than 1/2 of your personal services in a real estate and rental activities and spends more than 750 hours working in the real estate activity. Something like that (I don't have CCH up in front of me right now). Try doing a search on the IRS website. Something like "active real estate" and see what you get.

Reply to
JMc

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