Profit/Loss Allocation for Multi-Member LLC that Holds Property

[Joe Kamenar]

Suppose you have an LLC that has as it purpose to own a vacation property, where one member is the main investor and one member is the main user and partial investor? The "user" member will both rent out the property and use it for themselves (over the 14 day limit). The "user" member has also contributed capital to purchase the property, and pays for its expenses, including property taxes, HOA fees, insurance and repairs. The "main" investor is not using the property, nor is getting any of the rental income. He is interested in long term appreciation.

The question is regarding how to determine how to determine and allocate depreciation and net income/loss between the two investor members, especially since the personal use would negate it being considered strictly a rental property. Assuming the the LLC Operating Agreement permits, can the main investor take full depreciation or partial depreciation, while the user investor takes the profit/loss, with any net loss not allowed? Or, is there some other way?

Also, is it mandatory that you take depreciation on a property like this? Meaning, will the IRS mandate that depreciation recapture take place when the LLC sells the property?

Thanks,

- Joe

[Ashish Acharya]

Originally posted by @Joe Kamenar:

Suppose you have an LLC that has as it purpose to own a vacation property, where one member is the main investor and one member is the main user and partial investor? The "user" member will both rent out the property and use it for themselves (over the 14 day limit). The "user" member has also contributed capital to purchase the property, and pays for its expenses, including property taxes, HOA fees, insurance and repairs. The "main" investor is not using the property, nor is getting any of the rental income. He is interested in long term appreciation.

The question is regarding how to determine how to determine and allocate depreciation and net income/loss between the two investor members, especially since the personal use would negate it being considered strictly a rental property. Assuming the the LLC Operating Agreement permits, can the main investor take full depreciation or partial depreciation, while the user investor takes the profit/loss, with any net loss not allowed? Or, is there some other way?

Also, is it mandatory that you take depreciation on a property like this? Meaning, will the IRS mandate that depreciation recapture take place when the LLC sells the property?

Thanks,

- Joe

You can allocate income/ loss items as you want, but by the time you are closing out the deal, the -ve capital account have to be restored know as deficit restoration obligation.  Meaning you have to respect the capital account at the end. The partnership agreement needs to be drafted correctly. 

Yes, you have to take depreciation.