Capital Gains question

[Mohamed Nagoor]

I'm trying to better understand how CG works.

example:

I lend 100K to my LLC. Purchase a home via the LLC for 70K. 30K expenses ( includes rehab, travel, realtor expenses etc). I sell the home for 140K. Payback 105K to myself. 5K interest.

How much is my CG exposure?

[Alan Rohrer]

@Mohamed Nagoor

You should look at this in a separate few steps:

1) You fund your LLC (shareholder contribution) with $100k

2) Your LLC spends $70k on inventory (the house), and puts in an additional $30k to improve the inventory. Your LLC now has inventory worth 100k (note that no expenses have occurred yet for tax purposes)

3) You sell the inventory for $140k so your LLC recognizes $40k in ordinary income. This 40k will flow to your tax return and you will pay taxes on it at ordinary income rates.

4) You take out $105k from your LLC (shareholder distribution). Note that this would likely not be a taxable event.

If you were to draft loan documents then you would record interest expense of 5k on your LLC (which would be tax deductible), but then you would have to record interest income of 5k on your tax return (which would be taxable to you).

It would be much more simple to do steps 1-4 than to legally create a loan. 

Just consider the money you put in a contribution (rather than a loan), and the money you take out as a distribution (rather than a repayment).

Of course, talk with your tax professional first to make sure there isn't an outside detail I am missing that might change this for your situation.