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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12513
Experience:  Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
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I have questions regarding the tax treatment for an investment

Resolved Question:

I have questions regarding the tax treatment for an investment and development LLC which just sold an invested property. LLC treated the invested property as an inventory while purchased in 2010, and recognize income and cogs when sold in 2012. Is it correct? I would also like to know how to present it on partners' k1. Thanks.
Submitted: 10 months ago.
Category: Finance
Expert:  Megan C replied 10 months ago.

MyVirtualCPA :

Hello, and welcome to JustAnswer.com

MyVirtualCPA :

How are you today?

MyVirtualCPA :

Is the LLC in the business of buying and flipping real estate? Or are they in some other business?

MyVirtualCPA :

If their business is refurbishing houses and reselling them then treating them as COGS is correct

Customer:

Yes. the llc is in the business of buying and flipping real estate.

MyVirtualCPA :

Then yes, the treatment is correct

Customer:

how to present it on K1

MyVirtualCPA :

It would be reflected on the K-1 the same way as any other regular income and expense items are handled

MyVirtualCPA :

It would be the same if they sold shirts

Customer:

ok. so it is not anything related to capital gain/loss

MyVirtualCPA :

nope. this is inventory

Customer:

ok.

Customer:

thanks.

MyVirtualCPA :

You're welcome. If you would, please take a moment to rate my response as "excellent" so that I may recevie credit for assisting you today

MyVirtualCPA :

receive*

Customer:

ok

MyVirtualCPA :

Thanks so much!

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12513
Experience: Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
Megan C and 7 other Finance Specialists are ready to help you
Expert:  Megan C replied 10 months ago.
Thanks, XXXXX XXXXX your positive rating. Please come back and visit MyVirtualCPA for any of your tax, finance, or social security needs. It was a pleasure working with you today.
Customer: replied 9 months ago.

Hi


One of the partner's CPA has another view of this. The CPA suggested that since they flipped the property, he thinks this property is not an inventory but an investment. So he suggested to amend the tax returns; because, if it counts as investment then it's not revenue but capital gain. So the partners can save on self-employment tax.


 


My questions are


1. should this property be recognized as an inventory or an investment?


2. If it's an inventory, can the gain from the sale of this property count as capital gain, even though it was recorded as inventory?


3. if it can be treated as investment, does the company need to amend their tax return from the 3 years?


4. Will amending the returns result in a greater chance for an audit?


Thank you.

Expert:  Megan C replied 9 months ago.
Jason,

How are you? Thanks for your follow ups. First, whether this is inventory or an investment depends on the nature of the taxpayers business. If they actively buy and flip real estate for a profit, and that's how they earn their living, it's inventory and should be treated as such. If they are in some other business and just doing this on the side, that's an investment and would be treated as capital gains.

If inventory, the gain is ordinary. You cannot treat the gain as capital if the nature is inventory.

IF the property should be treated as investments, then yes - a 1040X would be filed. Amending the return in and of itself does not increase any risk of audit.

Please let me know if you have any further questions. IF not, please rate this response so that I may receive credit for further assisting you today.
Customer: replied 9 months ago.

Thank you for your reply.


 


 

Expert:  Megan C replied 9 months ago.
You're certainly welcome, Jason. Please let me know if I can be of further assistance.
Customer: replied 9 months ago.

I am wondering if you can review my tax return on some specific parts. Are you able to do that?

Expert:  Megan C replied 9 months ago.
Thanks, Jason

Unfortunately, we are limited to giving general information on the site. That's because all of this is posted on the web...so you can't have your personal information out there for everyone to see.

I wish I could help you out!

Thanks!

Megan
Customer: replied 9 months ago.

Not post online. Of cause.

Thank you anyway.

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