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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I am buying a piece of land with 30 other people to be run

Resolved Question:

I am buying a piece of land with 30 other people to be run as a summer camp.
We have been playing with the idea of doing this via an LLC. We plan on operating at a loss indefinitely.

Is this allowed and if so, what are the advantages/disadvantages of doing it this way?

Thanks,

Gregory
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G :

Why would you want to be involved in something that is designed to "operate at a loss indefinitely"?

Stephen G :

If there's clearly no profit motive, those losses won't be deductible for income tax purposes.

Stephen G :

Land is not depreciable; so their will be no deduction for the cost of the land.

Customer:

Think of this as a group summer home with planned activities for the kids. Its value added for our lives and we are not interested in running it as a business.

Stephen G :

You ask, "Is this allowed"? The answer is yes, but no for income tax purposes.

Stephen G :

Then the answer is absolutely, you can do it.

Customer:

How do you mean "no for income tax purposes"?

Stephen G :

When you said you were planning to run it as a summer camp, I thought you meant as a business.

Stephen G :

no = not

Customer:

I heard that it was possible to operate an LLC at a loss only for a limited amount of time.

Customer:

only possible

Stephen G :

That is a tax rule.

Stephen G :

So, that's not an issue in your case.

Customer:

...meaning that we would not be able to deduct losses from our personal finances...but we could still operate at a loss,...incurring no taxes other than the annual minimum LLC CA tax fee?

Customer:

... and property tax of course.

Stephen G :

Correct. You would also be able to deduct your share of real estate taxes on your Schedule A.

Stephen G :

You will want to make sure that all 30 members of the LLC understand that the losses are not deductible for income tax purposes.

Stephen G :

Why? Because the audit of one member could lead to the audit of other members.

Customer:

Great. Thank you very much. Very helpful.

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 2 other Tax Specialists are ready to help you
Expert:  Stephen G. replied 1 year ago.

By the way, in looking at your other similar question that has been classified as a duplicate question, this situation wouldn't qualify as a 501(c)(3) as the summer camp would be operated for the benefit of the 30 members, not the general public. Trying to qualify this type of situation would be impossible as long as the members benefited from the "summer camp" by using it and/or allowing their children to use it.

The reason I asked about the cost of the property is that, should you actually go forward with this project, you should only do so with professional legal advice. An LLC may not protect you or your assets from the activities conducted at the summer camp. It can get very complicated as to what activities would be protected and what may not be.

In any event, you would want a substantial liability insurance policy, which may not be able to be obtained at a reasonable cost.

If it were me, I wouldn't want to be an owner as an LLC member or any other form of ownership involving 30 different families. I'd want to set something up where I could use the property, but not have any liability for anything that may happen on the property, except thorough my own negligence. Just introducing alcohol to the equation could have far reaching liability implications particularly when you are dealing with multiple personalities, their spouses, guests, children as they mature.

You need to think about this very carefully.
Customer: replied 1 year ago.

Thank you. Yes...lots to consider.


 

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