BiggerPockets

I am member of a LLC (more than 1 member) that was formed in 2007 and we buy and sell residential property. I am getting ready to prepare tax form 1065 (and the related K-1 forms). We have bought & sold 2 properties within the tax year 2007. On form 1065, I'm assuming that our proceeds from closings would go on the line " Gross receipts & sales" and that our purchase price + rehab expenses + selling expenses, etc. would go on the line " Cost of Goods Sold" (via sch A). And since we are not talking about long-term capital gains (property held less than 12 months) then rehab expenses that I would normally think of as being capitalized (like adding a new bathroom) are not really capitallized (and depreciated) because of the short-term nature of this type of transaction. For general LLC expenses that are not related to specific houses I intend to put these on lines 9-21 on form 1065. What flaws do you see in this logic? Thanks in advance for your time!

First to reply to your questions:

Your " Gross receipts & Sales" are the selling price of these properties and not the " sales proceeds" from the closing. The Cost of goods sold would comprise of all the expenses on the closing document, ie. - realtor commissions, attorney & closing costs. Since these are properties that held for sale and [NOT] investment, then all of your rehab expense (regardless of held for less than 12 months) is not depreciable. These are Cost of Goods Sold.

Short term and Long term capital gains will not be considered here as this is all ordinary income from a trade or business and will documented on page 1 of your 1065.

Joe

EricFoster - thanks. Yes, I am a CPA with real estate tax expertise from a Big 4 Firm. I can provide guidance, but as you state, it can get tricky. Help from an experienced CPA is a plus.

Bob_in_VA - I'm in VA also and I can help you if you get confused or would like a more indepth explaination of some tricky items. Feel free to PM me with any questions.

I will have to say that you have chosen the wrong entity for the type of business you are running. Using an LLC for this ordinary trade or business will cost an additional 15.3% in Self-Employment taxes. You should be using an S-corporation for this business since an S-corporation is not subject to SE tax. You should pay yourself a modest salary ($500 a month) and the rest would be non-taxable distributions.

An LLC is a right choice for Rental Real Estate activities, but not for Rehabbing or a flipping operation such as yours.

Joe

This is a question for Joe: If you are in the business of property development, are sales of homes considered capital gains, or ordinary income? Also, do you depreciate rehabbed property that you rent?