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An llc has a mortgage on a commercial property, each member

is also personally guaranteeing the...
An llc has a mortgage on a commercial property, each member is also personally guaranteeing the loan. If the mortgage goes into default and the bank forces sell of the property and if the property sells for just enough to cover the the loan amount and the building has been depreciated over the last 12 years, would there be a tax liability passed on to the members even though there was no cash distribution to the members after resolving the debt and cost of sell?
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7/14/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,291
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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NPVAdvisor :

Yes, sorry, as the property was depreciated, and the members enjoyed that tax benefit (loss, or reduction in profit) there will be re-capture of that upon liquidation

NPVAdvisor :

The gain received from the sale of depreciable capital property that must be reported as income. Depreciation recapture is assessed when the tax basis of an asset exceeds the sale price. The difference between these figures is thus "recaptured" by being reported as income.

Depreciation recapture is reported on Form 4797.

Customer:

The money received from rent was only enough to cover the bank payments and the members never received any.

NPVAdvisor :

Yes, but when the 1065 was done, (and K-1s distributed) the depreciation caused there to be less taxable income (or more loss as the case may be) That tax benefit is what's being recaptured --- had depreciation not been taken, there would have been highr taxable income in those years (or, again, less less, depending on the situation)

NPVAdvisor :

sorry MORE loss

NPVAdvisor :

Here's an excellent article, with examples: http://www.biggerpockets.com/forums/104/topics/25595-how-depreciation-is-recaptured

NPVAdvisor :

and here's the IRS guidance: http://www.irs.gov/publications/p544/ch03.html

NPVAdvisor :

one more time ... had depreciation NOT been taken in those years, there would have been higher taxable income or less loss than if there had not been depreciation written off

NPVAdvisor :

Now, if there were accumulated passive losses that were not able to be taken - because the taxpayer had no passive income - (this will be specific to each taxpayer) if this qualifies as a qualifying disposition, then those losses can now be taken

NPVAdvisor :
Like Print

Passive Activity Loss ATG - Chapter 5, Dispositions

Publication Date - December, 2004


NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.


 




Table of Contents / Exhibit 5.1
Tax Code, Regulations and Official Guidance Search


Chapter 5, Dispositions


In A Nutshell


Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria:



  1. Disposition of an entire interest (or substantially all[1])

  2. In a fully taxable event (where all gain/loss is realized and recognized).

  3. To an unrelated party.

NPVAdvisor :

This is from the IRS guidance I linked for you, above

NPVAdvisor :

I still don't see you coming back itnto the chat ... sometimes if I move us to the "Question & Answer" mode that helps

Customer:

Thank you for the answer, because I am personally signed on the companies debt, I will probably be forced into personal bankruptcy and have no money to pay the tax, I wonder if the taxman could get his before the bank so that I wouldn't have the taxman on my back for the rest of my life. I will be unemployed and 63 years old.

NPVAdvisor :

I'm so sorry - DO you know off the top of your head whether there may have been previous losses that could not be taken?

NPVAdvisor :

I will certainly say this - Bankruptcy is there for a reason.Further, if you go that route be sure that all of you previous tax es have been paid, and paid on time, and you may be able to include some of that in the bankruptcy as well.

NPVAdvisor :

See this:


When You Can Discharge a Tax Debt


You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:



  • The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.

  • You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.

  • The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.

  • You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.

  • You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

Customer:

The business is actually consisting of 3 c corporations and LLC. The c corporations are the renters of the property held by the llc, we are looked at as a family of companies and file a, one of those corporations will have a substantial loss, all the companies will be liquidated to pay debt.

Customer:

With regards XXXXX XXXXX 240 day rule, if I go bankrupt soon after the sale of the businesses would that mean the depreciation recovery and other taxes associated with the sell would be dischargeable?

Customer:

consolidated return

NPVAdvisor :

It all depends on the date of the return ... and that return will cover tax year the sale occurred

Customer:

I sell the property now, I go bankrupt next month and I file the tax return next april ?

NPVAdvisor :

SO, in your case, it could be that the "or must not have been assesed yet" part of the rule applies

NPVAdvisor :

Sorry, look a the debt is at least three years old rule

Customer:

It sounds like I am just hosed for the rest of my life. Thank you for your excellent help.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,291
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Thanks for the rating Dave.

Just take it one step at a time.

I've seen much worse.

Let me know if I can help further,

Lane
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Lane
Lane
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