Partnership Loss on Property Flip

[ED_12]

A business partner and I formed an LLC (50/50 members) this year and purchased a property that we intended to hold as a long-term investment and use as a rental property. Long story short, we had to flip the property due to a later discovered ordinance in the municipality limiting rental properties on a given block. After fixing the property up and selling it on the market, we suffered a decent loss on the overall transaction.

Despite forming the LLC, the totality of the transaction was managed by my partner and I as individuals. We got a commercial loan with both of our names on it to finance the purchase and rehab, and otherwise paid for things out of our own pockets (all while staying 50/50). What is the best way for us to recognize this loss as well as deduct our eligible expenses we accumulated?

Thanks!

[PatriciaV]

From the IRS standpoint, you formed a partnership and need to file Form 1065 US Return of Partnership Income, which will include Schedules K-1 reporting the partnership activity for the year. You will include the information from Schedule K-1 on your personal return.

(If you completed Form 2353 and elected to be taxed as a corporation, you would file Form 1120-S instead.)

You will need TurboTax Business to prepare a business tax return.

Since you indicated that you and your business partner paid for the cost of running the partnership 50/50, the amount spent by each of you would be reported by the partnership as Contributions. This creates basis in the partnership for each partner. The property you purchased would be reported as a partnership asset and the rental activity would be business income/expense.

Due to the complexity of accurately reporting these items on a business return, you may benefit from the assistance of a local tax practitioner to advise on your particular situation.

[ED_12]

Hi @PatriciaV,

Thanks for the response! We will be filing a Form 1065 with Schedule K-1s for the partnership activity.

As for the recognition of the capital gain/loss on the asset (the property), would that loss be determined by the below equation? And would this be identified in the schedule K-1 we file with our personal taxes?

Capital Gain/Loss = asset sale price - (asset acquisition price + partnership basis)

Thanks.

[DianeW777]

Perhaps.  The partnership basis continues to be reduced for any losses sustained by the partnership until the basis is reduced to zero or below.  You would need to determine your actual partnership basis separately from the sale of the property. At that point it could be part of the adjustment to gain.

As suggested by our awesome Tax Expert @PatriciaV you might consider a tax professional for this final year.

[Carl]

due to a later discovered ordinance in the municipality limiting rental properties on a given block. After fixing the property up and selling it on the market, we suffered a decent loss on the overall transaction.

Understand that the property will not be entered as a rental, or as an asset since it was never used in the production of income (by renting it). Instead, it will be listed as inventory or something along those lines.

[Anonymous_]

@ED_12 

You (and your partner) need to determine how you are going to treat this asset. 

If your intent was to flip the property (i.e., that is the purpose of your business), then the property is inventory and the loss is ordinary.

If you treat the property as a capital asset (e.g., an investment or rental property that you intended to hold long-term), then the loss would be a capital loss.

[ED_12]

Thanks @Anonymous_,

The purpose of our business is not to flip properties, and instead we elected to do so only due to the circumstances we were faced with. 

With that in mind, my inclination is to treat the property as a capital asset. What's the correct way for us to recognize that capital loss?

Thanks.

[Anonymous_ · Accepted solution]

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@ED_12 wrote:

With that in mind, my inclination is to treat the property as a capital asset. What's the correct way for us to recognize that capital loss?

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If you are using TurboTax Business, you can enter the transaction in the Investment Income section (Capital gains or losses).

The loss will be passed through on your K-1s.