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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16547
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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A company I own and an individual have a partnership. There

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A company I own and an individual have a partnership. There is no legal entity for this partnership, but a verbal agreement to split all profits, losses, and taxes 50/50.

We purchased, fixed up, and resold a condominium unit for profit. We purchased the condominium for $6,500, sold it for $37,000, and will realize a profit of approximately $22,000 after all costs and fees are subtracted. We performed the majority of work for the fix ourselves.

The purchase and sale are in the name of the company, and the individual is neither on the deed nor a member of the LLC.

I am wondering the best way to minimize our tax burden, as well as the proper forms to use to report this. Again, each of us should pay 50% of any tax burden if it ends up being capital gains.

Also, it is my understanding that it may be possible to make this income tax / self employment tax rather than capital gains. If so, is this advisable, and how would I set that up?

Thank you for your help.

MyVirtualCPA :

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

MyVirtualCPA :

This activity that you describe is a capital gains activity. This would not be self employment tax, as this is a one-time investment type activity

MyVirtualCPA :

To lower your tax, I would deduct all expenses incurred to generate this sale, and ensure that I have contributed to retirement accounts

MyVirtualCPA :

You will report this transaction on schedule D, with one partner reporting 1/2 of the transaction and the other partner reporting the second half

Customer:

Thank you. Could you clarify - Schedule D for which form? Thank you very much.

Customer:

Never mind.. just the 1040. Thank you!

MyVirtualCPA :

Wait...

MyVirtualCPA :

You will need to fill out form 1065 for a partnership

MyVirtualCPA :

and it will list your profit and loss

MyVirtualCPA :

and the 1065 will issue a K-1 to each of the partners for use on their tax return

MyVirtualCPA :

I'm sorry

Customer:

No problem. I appreciate it.

Customer:

So to sum up... I need to fill out form 1065, and this will issue a K-1 form for each partner. Then, I report the capital gains as reported on the K-1 form on Schedule D of the 1040. Is that correct?

MyVirtualCPA :

You will do schedule e for 1065 income

MyVirtualCPA :

received from K-1

MyVirtualCPA :

http://taxes.about.com/od/partnerships/qt/partnership_k1.htm

Customer:

Okay. So I will use schedule E, rather than schedule D for this transaction?

MyVirtualCPA :

Correct, Schedule E will signify the income you received via the K-1

Customer:

Thank you. Will the income reported on schedule E be taxed as capital gains?

MyVirtualCPA :

Yes, it retains its character

MyVirtualCPA :

so, if it's capital gains to the partnership it will be capital gains to the individuals

Customer:

Okay. So to sum up again: I need to file form 1065, and this will issue a K-1 form for each partner. Then, I report the capital gains as reported on the K-1 form on Schedule E of the 1040. This will be reported as capital gains tax. All correct?

Customer:

And a final question - I believe that as a short term capital gain, it will be taxed at my normal earned income rate. Is this correct?

MyVirtualCPA :

Correct

MyVirtualCPA :

Yes, that is correct. Short term capital gains are taxed as ordinary income

MyVirtualCPA :

but there is no self employment component so your tax will still be lower

Customer:

Will I need to file form 1065 before I file my typical tax form, in order to have the K-1 ready?

MyVirtualCPA :

Yes, you will need to file the 1065 first to have the K-1 ready

Customer:

Excellent. Thank you for all of your help - I very much appreciate it. Have a great day.

MyVirtualCPA :

You too

MyVirtualCPA :

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