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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4018
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I have a real estate LLC as a partnership between my wife and

Resolved Question:

I have a real estate LLC as a partnership between my wife and I. I have made a few capital contributions to this account after the initial contribution. Once there are profits, should the capital contributions be repaid to me prior to any income distributions to the LLC members? From my understanding there are no tax consequences to capital contributions or their repayment, is that correct? How about if i did a loan instead of capital contribution, any tax consequences there?

If it maters, technically my wife and I are members of a holding company LLC, and that LLC is the sole member of the LLCs that hold our real estate.
Submitted: 8 months ago.
Category: Tax
Expert:  Stephen G. replied 8 months ago.

Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

It really doesn't matter what you do with the LLCs. There's no requirement to repay capital contributions before profit distributions; in fact, capital contributions aren't normally repaid by definition ie. capital contributions are made for either funds for investment purposes and/or working capital requirements.

Stephen G. :

Capital contributions would represent your initial equity in the LLC.

Customer:

Thanks Stephen G., just to clarify this are contributions made after the initial capital contributions. I guess my concern was, if I made a capital contribution to the LLC that my wife and I have as a partnership, does that in any way make the partnership no longer a 50/50 ownership or does it effect distributions later on?

Stephen G. :

Well, that would depend upon the terms of the operating agreement; if you weren't related and weren't filing joint returns, it could matter, but I suspect that you may not have a formal partnership agreement in addition to your LLC operating agreement?

Stephen G. :

Are you filing partnership income tax returns?

Stephen G. :

Questions?

Customer:

It's been set up as a "pass-through" entity, I know that much.

Customer:

i assumed since it was a partnership we'd have to do a partnership return, is that not the case?

Stephen G. :

Well, if you have more than one member in your LLC which is a disregarded entity for income tax purposes, you would have 3 options as far as income tax reporting; you could file as a partnership, a regular corporation or an S-Corporation, the partnership and the S-Corp both being pass-through entities.

Stephen G. :

Do you have an accountant or CPA on board?

Customer:

I do have a CPA, they helped set up this new structure for me. Based on their recommendations. And this is a partnership, it is not corp or s-corp.

Stephen G. :

Well, you have 2 LLCs involved, is that correct?

Stephen G. :

I'm not why or what advantage that affords you; but perhaps your CPA has explained that you?

Customer:

Technically 3, there is the holding company LLC of which my wife and I are members, that's the partnership. Then the holding company LLC is the sole member of two LLCs that will have rental properties in them

Customer:

The whole structure was based on adding asset protection, while keeping in mind tax ramifications and reporting.

Customer:

and since my wife and I are 50/50 owners (members) of the Holding Company LLC, I just want to make sure my capital contributions don't change that balance. And if it does, if i could maybe simply refund myself the capital contributions made, or if i can just say the capital contribution was made half from me, half from my wife

Stephen G. :

Sure, you can can do either of those, but since you have CPAs & involved and they will be preparing whatever income tax returns are deemed necessary, your question re how to handle the additional capital contribution should really be directed to them.

Stephen G. :

Hopefully you have good liability insurance polices on the properties that you have in the LLCs and you have the proper endorsements that reflect the current ownership of the properties if they have been or will be transferred to the LLCs. That remains your best protection against any potential liabilities that could arise based upon your rental activities.

Customer:

Yes, I've got an umbrella policy adding additional liability coverage to the properties, and I have given my insurance company a heads up the properties will be moved to LLCs in the near future and they are fine with that and just said to let them know when that's complete. So I've got that part covered, the LLCs are just for additional protection. I've read both that it's worth it and it's not to use LLCs for rental properties, I guess i took the more defensive route but given the option to do it again I may have stuck with just insurance coverage. Live and learn i guess :)

Customer:

Thanks for the help!

Stephen G. :

OK

Stephen G. :

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Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4018
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 2 other Tax Specialists are ready to help you

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