Real Estate LLCs and "redirecting" money (aka profits)

Sep 17, 2008 3 Replies
A

I have two LLCs (S Corp) called LLC #1 and LLC #2 for purpose of this example.



LLC #1 invested in a fix-flip property and made $50,000 profit.



LLC #2 has another property that it wants to buy as a long term rental.


I know the IRS tax rules state that "Fix-and-Flip" type properties DO NOT qualify for a 1031 like-kind exchange, but what if I hadLLC #1 "invest" the $50,000 into LLC #2 ? I can call the investment an "expense" and thereby cause my yearly balance sheet to go to ZERO. Therefore no tax implications.



LLC #2 holds on to the property for a year+, sells it for a very small gain (just for purposes of this example), gives the $50,000 BACK to LLC #1. LLC #1 just has its expense "recouped", but I don't think this would count as "income".



Is this a way to avoid paying short-term capital gains? This does NOT seem right. What am I missing?



Thanks! S


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D

What you are missing is covered in Principles of Accounting and in Principles of Taxation.

What doesn't seem right to you - paying taxes or the bookkeeping machinion you have conjured up?

If you want to avoid the short-term capital gain, rent it out with an option to buy after 1 year. If they renter doesn't commit to buy after 10 months, put 'em on a month-to-month and put the house on the market. But if you want the $50,000 in cash, you're gonna have to pay short-term capital gain taxes.

Dick

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S

Calling the investment an expense doesn't make it one.

Therefore, the gain remains taxable.

Seth

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K

Your big mistake is in thinking LLC#1 can deduct its investment in LLC#2 as an expense. It's not an expense, it's an asset, either a loan receivable or a membership interest in #2. Either way, LLC#1 can't deduct it.

Katie in San Diego

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