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William Ellis, CPA
William Ellis, CPA, CPA
Category: Tax
Satisfied Customers: 296
Experience:  Over 15 years of experience in public accounting
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I am a Florida resident. I have a real estate partnership

Customer Question

I am a Florida resident. I have a real estate partnership in South Carolina, We have one vacant condo. As of 12/31/09, the building has a tax basis of $94,309 less accumulated depreciation of $37,260 for a net of $57,049, plus land with a basis of $5,000. The partnership owes $69,592. My net basis is ($3,968) and my partner basis ($3,575).
The property is for sale with an asking price of $110,000 for several years. I would like to step out of the partnership giving my ownership to my partner. What would be the tax effect upon me if I tell my partner will will not be able to make any further payments for the mortgage and expenses? Would I have a taxable gain of $3,968 or more.?
Submitted: 3 years ago.
Category: Tax
Expert:  William Ellis, CPA replied 3 years ago.

William Ellis, CPA :

Good afternoon and thanks for letting us assist you. First of all, is the partnership's name on the deed of the property, or are you and your partner's name on it? If the partnership's name is XXXXX XXXXX deed, you can offer to sell your partnership shares to your partner in exchange for them covering your portion of the expenses. This could require you "selling" the shares to them in installments. To speed this up, you could also gift $13,000 each year to your partner until all of your interest is transferred. I would not simply inform your partner that you will no longer handle your share of the expenses because you may be violating the partnership agreement which could land you in court. Plus, your partner may not be willing or able to buy your shares and handle your share of the expenses. I hope this helps, Bill Ellis.

Customer :

I do not know if the deed is in the partner's anme or the partnership name. If the deed is in the partner's name does your answer change.?

Customer :

During 2010, each paid for real estate taxes and expenses about $7,200 which for the most part other than the principal payment of the mortgage is our 2010 business loss. I need guidance because I do not understand what is the amount of my partnership interest. Is it half the mortgage amount plus the annual expenses or is it the negative capital basis of $3,575 at the end of 2009? Thus, what is my selling price, is there any gain or loss?

Customer :

I agree I do not want to land in court, if my partner is willing to handle the expenses and keep the profit if any on sale of the condo, what would be your answer. What is my tax liability asssuming my partner is willing to assume the expenses and keep the profit if any on the sale of the condo?

Customer :

If my partner is unwilling or unable to handle all the expenses and keep the profit if any on sale of the condo, what are the alternatives?

William Ellis, CPA :

Yes. If the property is in each of your names and you tell your partner that you will no longer pay your portion of the expenses, he may stop paying his share as well. If this happens, the bank may foreclose making your portion of the remaining debt taxable to you unless you are insolvent.

William Ellis, CPA :

Has this property ever shown any income?

William Ellis, CPA :

Was a partnership return filed for 2009? If it was and you have a copy, I can probably tell you what your basis is.

Customer :

The property has a small amount of income when it was rented over four years ago.

Customer :

On the partnership return for 2009 the liability and capital reflects the following:

Customer :

Mortgage loan $69,592,

Customer :

capital ($3,968) for my partner

Customer :

Capital ($3,575) for me

Customer :

Total liability and capital $62,049

Customer :

Does this help?

William Ellis, CPA :

Tell me what your total assets are, and the total liabilities. On your K-1, what is your partnership percentage?

William Ellis, CPA :

The rental house has been on the market for a while at $110,000. Do you know what its appraised value is?

Customer :

Building cost basis $94,309, less accumulated depreciation of 37,260 for a net of $37,260. Land cost basis is $5,000.

Customer :

Oops net building is $57,049. The total assets is $62,049.

Customer :

Liabilities and equity follows: Mortgage loan $69,592 less negative capital of $7,543 for a total of $62,049. Of the negative capital my portion is $3,575 and my partners portion is $3,968. The condos in the area are listed from $110,000 to $125,000. The assessed value from the government is $97,000. We did not get a certified appraised valuation, but the real estate agent and firm when I last checked was what they recommended as the suggested selling price. We paid $99,309 for the condo. In the last four years for expenses, real estate taxes, repairs, and mortgage payments we incurred more that more than $60,000. I have tried to convince my partner to lower the selling price for the last several years to not avail.

William Ellis, CPA :

I'd advise you to go to a realtor and have them see what the fair market value really is. If they can find a buyer, approach your partner with the offer. Tell them if they don't want this deal then they can buy you out at the adjusted cost of $31,025. If they don't want to pay, offer to sell in installments in exchange for handling your share of the expenses. Thanks, XXXXX XXXXX

Customer :

I need clarification on part of your answer egarding your suggestion on the deferred sale and keeping our 1120S open. After several years will I have a tax problem if I close the close the chapter S corp while I am collecting of the deferred sale that you recommend? Your last suggestion was to kept the 1120S open. I want to thank you for your informative help in giving me direction on the sale of this commerical property to another 1120S. Also, I appreciate the information of the lowest interest rate that the IRS will allow on the sale of land and building.

William Ellis, CPA :

No. You can formally change the agreement showing that you won't collect any of the income nor be responsible for any of the expenses. This way, you'll simply be a stockholder until you're able to transfer your stock to your partner. Thanks, Bill.

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