What are Passive Loss Limits in an LLC with multiple members?

3 Replies

Hello All, 

I have been reading up a lot on Passive Losses lately as we have been looking at some larger properties and considering using Cost Segregation along with that. These purchases would be through LLCs that vary from 2-4 members each.

My *understanding* is that a 'taxpayer' can deduct up to 25K of passive losses IF there income is below 100K and then phased out up to 150K.

Questions are;

 1) Is that 100K level for single or married filers? Seems hard to find a clear-cut answer on that. 

2) In an LLC of say 3 Members where the Operating Agreement states all Member share equally in depreciation proportionate to their shares of the LLC, does that mean *each* member could take up to a 25K loss as long as all members are under that 100K limit and participate in the management? This is an LLC that use's K-1s to pass income to individuals. So if the LLC as a whole has had a 60K loss, could *each* of us take a 20K deduction

3) If 2 of the 3 of us qualified but one did not of having under 100K would that limit the first two from using the deduction?

4) I assume if we sold a *different* property that had a large capital gain that would need to be added to our 'day job' income and put together we would still need to be under the 100K limit to qualify?

5) If our income did grow enough that we were over the 150K limit and those losses were 'carried forward' I *think* those would come into play when we sell the property? Can those be applied to Depreciation Recapture and Capital Gains both? What happens to those suspended losses if we do a 1031 Exchange?

My thought is if we used seller financing to eventually sell and had say 100K of suspended losses could those be applied to the 'recapture tax' first since that would be due in year 1 and the capital gains would be spread out over the term of the seller financing?

Thanks for any help in organizing these thoughts!

Dan Dietz

@Daniel Dietz

1) Is that 100K level for single or married filers? Seems hard to find a clear-cut answer on that.

$25,000 limitation applies at the $100,000 level for both Single and Married Filing Jointly.

2) In an LLC of say 3 Members where the Operating Agreement states all Member share equally in depreciation proportionate to their shares of the LLC, does that mean *each* member could take up to a 25K loss as long as all members are under that 100K limit and participate in the management? This is an LLC that use's K-1s to pass income to individuals. So if the LLC as a whole has had a 60K loss, could *each* of us take a 20K deduction

An LLC/Partnership is simply a pass-through entity. The income/losses from a partnership/LLC get shared among the partners/members based on partnership agreement.
Once the losses are given to the individuals, then the $25,000 limitation will apply.
However, there are greater rules to follow if you want to be able to utilize losses from a partnership that owns real estate instead of owning real estate directly.

3) If 2 of the 3 of us qualified but one did not of having under 100K would that limit the first two from using the deduction?

Other partners/members in a partnership have no bearing if you can take the losses in current year or suspend.

4) I assume if we sold a *different* property that had a large capital gain that would need to be added to our 'day job' income and put together we would still need to be under the 100K limit to qualify?

Whether you can utilize the losses or not, you have to look into your Modified Adjusted Gross Income(MAGI).
MAGI will include gains and W-2 income along with other items.

5) If our income did grow enough that we were over the 150K limit and those losses were 'carried forward' I *think* those would come into play when we sell the property? Can those be applied to Depreciation Recapture and Capital Gains both? What happens to those suspended losses if we do a 1031 Exchange?

You are eligible to utilize suspended losses in the event you sale the property.
You can reduce the taxation of boot by suspended losses.

@Basit Siddiqi thank you for the great concise answers!

Can you elaborate what terms or how I would find more information on what you mean by;

"However, there are greater rules to follow if you want to be able to utilize losses from a partnership that owns real estate instead of owning real estate directly."

Thanks, Dan Dietz

@Daniel Dietz

Some of the rules would be

1) You need to be a managing member/general partner of the LLC/Partnership.
2) You need to be atleast a 5% owner in the partnership

Example
a limited partner with a 33% interest in a partnership that owns real estate was allocated $20,000 of losses.
He is not able to utilize the $20,000 on his personal return but instead it gets carried forward.