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Richard, Tax Attorney
Category: Tax
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Experience:  29 years of experience as a tax, real estate, and business attorney.
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Two individuals form an LLC with the purpose of purchasing

Customer Question

Two individuals form an LLC with the purpose of purchasing a house, improving it, and selling it. One is a bulider/developer who will do all the work. The other is just an investor and this is the "only" house he's been involved in that year, and it's not his trade or business. The project takes 14 months. One of our accountants says its ordinary income for both, the other accountant says the K-1 to the investor should be long term capital gain, not ordinary income. The accountant that says ordinary income says property bought for the purpose of renovating and flipping isn't subject to LTCG even if it's not your business...the other disagrees. Do you know the answer and can you point to tax code that would support? We'd like the one partner to claim LTCG, but don't want to do anything wrong.
Submitted: 6 months ago.
Category: Tax
Expert:  Richard replied 6 months ago.
Good morning Tommy. My name is ***** ***** I will be helping you today! It will take me just a few minutes to type a response to your question. Thanks for your patience!
Expert:  Richard replied 6 months ago.
This is an issue that crops up frequently. The question is whether or not the seller is selling the house in the ordinary course of its business. A good summary of this can be found at: . But, here's the thing. You must remember that the seller here is the LLC, not the builder. The LLC is a separate and distinct entity. And, the issue is one of fact. And, it's important how you write your Operating Agreement. As drafted, your accountant is right in that it looks like the intent of the business of the LLC is flipping the house. This would prompt an accountant to take the position that any gain is ordinary income. What you want to do is change your Operating Agreement to provide that the business of the LLC..and remember this LLC is simply dealing with this one to buy, renovate, and hold the house for rental or investment. That shows an investment intent, not a flipping intent. Then, if, later, the LLC decides to sell the house, then it's the sale of a capital asset (rather than inventory), and you would have a strong basis for treating the gain as capital gain. Thank you so much for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as OK, Good or Excellent (hopefully Good or Excellent). Otherwise, I receive no credit for assisting you today. I thank you in advance for taking the time to provide me a positive rating!

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