HO - UnRecaptured Gains on house sale? ...Moved HO for LLC 700mi & (Is sale & buy a like-kind exchange?)

[pkwag]

Originally I read that if our HO was inside the living areas of the house, and the sale was less than $250,000, I didn't need to report the sale.  Later I read  the sale did need to be reported because allowable depreciation of the HO created taxable UnRecaptured Gain. If that is true, HO sales always needs to be reported and I need to Amend my 1065 with the sale info on our HO Asset of 21% of our house sale figures.  Plus I now owe taxes & penalties, when I was expecting a refund due to the business expenses from the move to relocate our business across country.

FACTS:

In 2019 my husband & I moved our 1065 LLC partnership (50/50) and home office (21%) from our 10yr location in NE to TX in order to generate a greater customer base.  Since we couldn't keep our service company name (due to another company using it) and were forced to recreate our LLC, we chose to redo it with my husband a single member/sole proprietorship. 

1.  Sale of home resulted in UnRecaptured 1250 gain  from 10yrs HO depreciation tax deductions.

2.  November 2019:  Proceeds from sale (plus money from personal loan) were applied to purchase of another home, which includes our HO (home office).

3.  Nov & Dec 2019:  Rented a bedroom and HO space.

4.  Jan 2020:  Moved into new home, operating HO from new home.

QUESTIONS:

1.  Since we moved the HO from NE to TX with the HO continually operating, is there any way to avoid the 1250 UnRecaptured gains on the K-1 from selling the house to move our business?

2. Is the LLC partnership disposed of completely due to a "sale" or "other"...since it's really the same business.  In the 1065 I listed all our assets which are fully depreciated as being "disposed-gifted" for $0 on the house sale date, and entered them as assets of the created single-member LLC fully depreciated with the original purchase date, basically transferring them from the old LLC to the new.

3. Does any of the 1250 UnRecaptured Gain from K-1 come from the disposition of interest in the partnership by myself (no longer a member of the LLC) or from my husband (new LLC single member/sole proprietor)?

4. Since the K-1 contains all the HO sale information from entries in TT Business for the 1065 return, when I re-enter the information in TT Deluxe, does it know not to charge me again regarding the UnRecaptured Gain?  I realize I must make the entries due to the HO to determine if I need pay on profit from sale of the home, but want to make sure that's all it's doing. 

5. I need to Amend my 1065 with all the house sale figures.  Originally I read that if the HO was inside the living areas of the house, and the sale was less than $250,000, I didn't need to report the sale, but that was only regarding profit.  But then I saw the reporting rules were different due to UnRecaptured Gain/Loss from HO depreciation taken in previous years.  Now I owe taxes instead of getting a refund....but it would be worse if I hadn't found out now to correct it.

[mellish7777]

Wait....does the llc own the house? The home sale exclusion is for individuals and disregarded entities and your llc sounds like it's a multi member llc and that doesn't qualify.

[pkwag]

The LLC is husband and wife, and we have a home office in the house, which is not owned by the LLC.

[mellish7777]

Read the solution here for multi member llcs becoming single member llcs:

https://ttlc.intuit.com/community/business-taxes/discussion/re-my-llc-started-as-a-partnership-but-i...

And you took the home office deduction on your 1065? That could be a problem.

[Carl]

You need to seek professional help. Outside the fact that the residence was a 1031 exchange, matters are much more extremely complicated because you basically closed and disposed of a multi-member LLC entirely, which means you closed the HO of that multi-member LLC. There was no "transfer" per-se.  Then in the new home you opened a completely new business (as far as the IRS is concerned) as a disregarded entity/single-member LLC with a HO for the "new" business.

So you "DO" have to deal with disposition of the old HO and you "DO" have to deal with depreciation recapture on that old HO, completely outside of the 1031 exchange. This is "NOT" simple by any stretch of the imagination. But the below information is offered to help you understand how to deal with this under normal circumstances. Your circumstances are "not" normal.

Close Home office, Open New One

• Under Business Expenses, start/update Home Office Expense.
• Select YES, then continue
• Select both requirements, then continue
• Select NO, continue
• Select at least one of the options, continue
• Your home office qualifies. Continue
• Select YES, continue. (It may say “all 12 months, but YES anyway)
• I’m  assuming 100%, then continue
• You’re on Home Office Summary screen. Elect to EDIT it.
• Verify the address (shud be old home office), continue
• Select NO, continue
• Select YES, you used it, and NO, you didn’t share it. Continue.
• Select I Own it, continue
• Select YES, continue
• Confirm square footage, continue.
• Select Actual Expenses, continue
• Confirm Mortgage Interest Applies, then click DONE
• Click Continue
• Select NO, all expenses apply to entire home, continue. (If you have HO only expenses, select NO)
• Enter PMI if paid, leave blank if not, and continue.
• Select NO, continue
• Enter RE taxes, continue
• Utility expenses. You have box for both entire home and HO only. Enter as needed, Continue
• Repair expenses. Enter as needed for whole home and HO only, continue.
• Enter property insurance, continue
• Enter other expenses, continue
• Select NO for casualty/theft
• See your summary, then continue
• Home office asset summary. Only the old HO listed here. Edit it.
• Select Your Home, continue
• Review information, continue
• Did you stop using this asset in 2015? YES YES YES YES YES! 
• Enter date of disposition. Must be on or before the day you moved out. Then continue
• Percentage of Biz Use screen, continue
• Fed Depr Dedcution screen, just continue
• Disposition of HO, click NO. You are indicating it was NOT a separate structure.
• Did you sell? Click YES.
• Indicate ownership, enter address, continue
• Sales information. Enter it, and just continue working things through until you are returned to the “Your Home Office Asset Summary” screen.
• Now click the Add An Asset button and start working this through to set up the new home office.

[mellish7777]

Outside the fact that the residence was a 1031 exchange

This is absurd.....where do you see a 1031 exchange in the question? A residence? Don't think so.

[AmeliesUncle]

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@mellish7777 wrote:

.where do you see a 1031 exchange in the question?

---

It is in the title.  Just because it is a residence would not prohibit a 1031 exchange for the business part.  But assuming a OP did not use a third party intermediary, it would not qualify.

As the others mentioned, the Multi-Member LLC should NOT have been directly claiming an office deduction.   It could have had an Accountable Plan to reimburse the costs, or in some cases the deduction could have been taken on the Schedule E as "Unreimbursed Partnership Expenses".    As was also mentioned, you need to go to a tax professional, and even more so because it was the final year of a Partnership.

[pkwag]

Thank you for your information.  Yes, it is certainly complicated.  Since they are two completely separate LLC businesses, especially since one is a multi-member LLC filing as a partnership and one a single-member disregarded LLC that is filing as a Schedule C sole partnership, I understand the 2019 home office in NE will have 11yrs depreciation for UnRecaptured gain, since there was no loss on the sale.

I use TT Business for my 1065 LLC tax return, and only included the multi-member LLC on it.  I do need to amend my 1065 to include some more items, as well as the UnRecaptured gain, which is shown on my K-1 from the 1065 tax return.  My TT returns for the past 11yrs show all HO depreciation and understand the totals adding up to the UnRecaptured gain.

I separated all income and expenses in QuickBooks P&L stmts for each company, so I could list the new LLC sole-proprietorship in TT Deluxe Schedule C.  

I could not follow your detailed instructions, perhaps because you were referring to a different TT program than TT Business for the 1065 partnership and the TT Deluxe for the 1040 with Schedule C for the new business after the move.  All items you mentioned to include have been included on the 1065, and there were no HO expenses except rent for the new HO in Nov & Dec.

I have listed all the HO as a sale and entered in all information, which is how I attained the UnRecaptured Gain amount on the K-1.  I do not believe there is any reason to declare the sale a Like-Kind Exchange since there should be no tax related to the sale profit from the home, unless I understand that incorrectly.

What I do not understand is why when entering when there was a change of ownership in TT Business, which I put down for both of us, that it wanted the percentage before and after the change date, and when I put 0% after the change date, it didn't like that.  There must be another place to enter the disposition of the business at the time of the move, when we switched to the single-member LLC.

Thank you for your detailed hep, and if you have any other suggestions, I think just knowing they are both considered as two separate entities by the IRS is wonderfully helpful.  The reason I was unclear is that when we first started the old LLC after moving from IL to NE, we were audited and the IRS didn't like how I wrote off the full cost of the assets that were used in the new LLC, and he just made them start with the value remaining from the previous company with a five-year lifespan, regardless of how old they were.  I suspect he was just making it easier for himself in doing so, but that isn't an issue here because there was no depreciation value left in any of them, unless I sell them in the future with a gain in the new business.

Thanks again

[pkwag]

Also, the LLC partnership Home Office was 21% of our residence, and included as that in our 1065 partnership returns for depreciation of 21% of the value of the residence over 39 years.  That is the UnRecaptured gain I evidently need to pay tax upon for that business.  I have kept records on this Home Office for the last 11 years, and was unsure of how to handle it since we redid the business into a Sole Proprietorship.  In QuickBooks I've generated all separate expenses & income due to the need to pay state taxes in NE, but not TX.

[pkwag]

Amilees Uncle,

When I was audited in 2011, the IRS auditor did not have any issue with my home office deduction through the 1065 business tax return, since he said it came out the same either way.  Yes, I believe I have seen is correct for it to be listed in Schedule C & E, but since we are a husband & wife LLC required to file as a partnership, he allowed it.  At the time the entry information was clearer, so I kept doing it that way.