Investment monies

[Dee M.]

I know there are some incredibly experienced and smart people on here, so I am hoping I can get some help with this question in which my contractor who does fix and flips also, STRONGLY disagrees with me. He has someone who invests money (a private individual) in a LLC the contractor has set up; this person (contractor) will buy a property, rehab it, sell it and split a percentage of the profit with the investor. The investor has been told by his accounting firm that he has to pay gains the moment the property is sold, much like a stock, (exactly like a stock) so therefore, he has to track the buy date, the sold date, etc., for the "gain" period and pay taxes right away based on the sale date.

The properties are never in his (investors) name and are not his primary residence or any type residence for him at all. He only invests in the L.L.C., and is not involved in any other manner. He simply gets a return on his investment. The contractor tells me that he also checked with one of the larger accounting firms in Denver and that it is correct in being treated like a stock, I disagree and told him, it does not matter if he is selling a box of nails, jewelry or shoes, it is simply a return on the investment the (investor) makes. It is not his (the investors) primary residence that is sold, it is a fix and flip in the name of a LLC, not connected to him, other than he invests in that L.L.C., so treating it like a stock sale and the cost basis of a stock is incorrect. Thanks to everyone in advance for any insight or education on this subject.

[J Scott]

Originally posted by Blane Harvey:

Taxes aren't due immediately but would be due the year of the sale assuming the LLC made distributions to its members under a K1 form. If the LLC chose not to make a distribution and purchased additional properties with the profits there might be some delayed gains and the investor would have a return on paper, but as soon as a distribution is made, taxes are due.

I'm not a tax professional either, but I think this statement is incorrect. Unless the LLC elected to be taxed as a C-Corp, the income would necessarily flow through to the shareholders in the year it was earned. For tax purposes, distributions from an LLC can't be deferred to another tax year...though the cash can remain in the LLC as retained earnings.