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K1 and Net Rental Income. I hold limited memberships into…

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K1 and Net Rental Income.I...
K1 and Net Rental Income.I hold limited memberships into several LLCs that own / operate commercial real estate investments. One of my these LLCs issued a K1 (Form 1065) that shows over $65k in Box 2 "Net rental real estate income".When I account for this it increases my tax obligation over $15k. There was never any distributions made from this LLC. Essentially this $65k is phantom income.How can I pay the taxes on income that I never received? Am I missing something?
Submitted: 7 months ago.Category: Tax
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Answered in 9 minutes by:
10/3/2017
Tax Professional: Lev, Tax Advisor replied 7 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,858
Experience: Taxes, Immigration, Labor Relations
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The issue is that LLC is classified as a partnership - and because of that the LLC itself pays NO income tax - but all taxable income is passed to partners/members in proportion of their partnership shares.
That income was constructively received by the LLC and is taxed to to you as a partner REGARDLESS if distributed or not.

As a result - when that amount will eventually be distributed - it will NOT be taxed.

.

You just elected such form of the business entity which pays no income tax, but passing that tax liability to partners.

So that is not a phantom income - but your share of actual income received by the partnership.

.

How that income was used - that is between you and other partners. You may decide to distribute all or a part of that amount or you may choose to purchase another investment property within the LLC, etc.

If that creates an issue for you - and other partners - you might want to elect that LLC to be classified as C-corportaion - which will pay its own income taxes on income - and you will be taxed only on actual dividends distributed to shareholders.

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Customer reply replied 7 months ago
Does it make a difference to my tax obligation whether or not I am considered a "Real Estate Professional" or if I'm materially involved in the management of the investment?
Tax Professional: Lev, Tax Advisor replied 7 months ago

If that income is realized - it will be added to taxable income regardless of "Real Estate Professional status and regardless if that is passive or active income.

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Tax Professional: Lev, Tax Advisor replied 7 months ago

The difference may be if that is self-employment (business) income or not and if you have losses - that losses may be treated differently for real estate professionals.

But regardless - income realized will always be taxable - that is just a matter to whom.

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