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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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I bought a property under an LLC in 2007 because it was a great

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I bought a property under an LLC in 2007 because it was a great deal. I never rented it or lived in it, but have been working on it for the past 1 1/2 years. On 2007 taxes I counted the property as "inventory" on my Schedule C. When I sell the property I want to try to pay only Long Term Capital Gains Taxes on my profit. Is this possible? I think listing it as inventory may have been a big mistake.
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear Help CCR,

 

IS your LLC in the business of renting properties and acquiring and selling properties?

 

Or was this just set up to handle this one property?

 

IS this a single owner LLC?

 

Did you check the box to elect S-Corp treatment?

 

 

Customer: replied 5 years ago.

This is a single owner LLC that I set up a few years ago when I was thinking about starting a window replacement business. I opened an account with a window manufacturer under the LLC, but never used it for anything else. I put the house under it for no other reason then "because I had it" & it seemed like many other people buy houses under LLC's.

I have rental properties as well, but they have always been in my personal name.

I do not recall checking a box to elect S-Corp treatment.

 

Thanks for your help!

Expert:  Ed Johnson replied 5 years ago.

Thank you for your additional information.

 

As an LLC, single owner, you are treated by the IRS as a sole proprietorship.

 

The sale of this property will be treated on a schedule D.

 

You will only be exposed to capital gains of 15%.

 

You are correct, that it should not have been carried as inventory, but should have been carried as an asset. This is a book keeping error, and does not change the charachter of the transactions.

 

If you filed taxes in the past listing this as enventory you simply need to file an amended return.

 

One big question that is lingerin if is you took depreciation. Let me know if you did at anytime in the past take depreciation for this property.

Customer: replied 5 years ago.

I did not take depreciation. I listed my purchase price + labor costs + material & supply costs under Part III lines 33-42 of the Schedule C. I made my inventory value = to my costs so that the final line 42 was zero. It did not effect my taxes at all last year, do I need to ammend still? Can I just not file the Schedule C this year (2008) and then when I file 2009 taxes with a sale just do a Schedule D. Would I list this property as "second home" on my schedule D and my LLC would not need to be mentioned?

Expert:  Ed Johnson replied 5 years ago.

I do not know what you did to your taxes before. It sounds like you filed a schedule C to capture the expenses related to the property, but this was not an income producing property.

 

while you may have intended it to be, If by the time you disposed of it, if you did not produce income, then any losses you may have taken from your personal returns may have to be recaptured by the IRS.

 

My recommendation is to do amended returns.

 

If you end up with a net profit from the sell of realestate under the process you are doing, you may be exposed to Self Employment tax, on the net profits of 15.3%. You do not it seems qualify for a realestate professional.

 

This is not an inventory item. If you were a home buidler, you would have inventory.

 

If you were a realestate professional you would have inventory.

 

You should correct this. You may get by with it, but on an audit the IRS would catch this.

 

If you never reduced personal income by the schedule C losses in prior years, you may be able to get by with it. BUT if you reduced personal income and paid less tax because of the Schedule C losses, in pior years, you will need to amend.

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 6 other Tax Specialists are ready to help you

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