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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 482
Experience:  Former IRS Revenue Agent
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My husband and I own a rental home with another couple under

Customer Question

My husband and I own a rental home with another couple under a california LLC aggreement. We have filed LLC taxes and K1's each year. Only my husband and I are on the mortgage, however, not the other couple or the LLC because the lender did not allow the transfer (back in 2008). We are selling the home now and California Franchise board requires capital gains to be withdrawn at the time of the sale. As it stands in escrow, only our tax ID will be affected. (not the LLC or other couple)
I want to know if, at the time of filing our taxes we then report the capital gains under our K1 and , as we will have paid the full amount (essentially overpaid) as it did not reflect the ownership percentage laid out by the LLC, will we then be able to get a refund (and the other couple will also file their taxes and pay their capital gains percentage under their taxes)? Please help us clarify! thank you! Jennifer
Submitted: 1 year ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 1 year ago.

Dear Customer,

When you receive your 1099-S, it will list your full sales amount and the tax withheld. You need to have an agreement with the other couple about what to do with the withholding. Do a clear calculation because the refund or additional tax will show up on your tax return and not theirs.

You may want to have an agreement with them and not to just close down the LLC. Keep some cash on hand in the LLC just in case that the tax due is higher or lower than the withheld amount.

There is a rule called "substance over form". So, you and your husband should file the long-term capital gain or loss on your personal tax return. This is what you do as below. But when the time comes, please find a tax professional to do your tax return.

On Schedule D, report the long term capital gain, by reporting the date of purchase and date of sales, and use the full amount given to you on the form 1099-S, as your sales proceeds. Then, in your basis, cost column, deduct everything you are entitled and your fellow members' part.

Therefore, your net long-term capital gain will show up correctly.

For example, net proceeds, 300,000, minus basis of the entire house (the purchase price of the house, add up back the depreciation, sales costs). This amount is the net gain of both you and your husband's and the other couple's. Say this cost is 250,000. Then, the net profit from the sale should be 50,000. But you are liable on the tax only for 25,000. So, you add up in the cost of 25,000.

So, on your tax return, it will show the proceeds of 300,000 and your basis of 275,000. Then, your net long-term capital gain will be taxable on your own tax return and at your own rate of long-term capital gain.

As to the other couple, there are several options. They can get a flow through from the LLC on their K-1 for long-term capital gain of 25,000. That will be the easiest way for them. Your K-1 will show 0 long-term capital gain.

Your professional return preparer will know how to prepare the tax returns.

Well, make sure that you dissolve the LLC and this sale properly. You need to get an attorney to make sure that you and the other couple sign an agreement to document the sale of the place.

According to your writing that the house' mortgage is under your name, but be aware that the deed and any transaction requirement you may have stated and agreed under the LLC. If there is nothing is on their name, the LLC could not have existed. Make sure the legal procedure is properly taken care, too.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP