LLC Tax Savings for Land with Windmill Income

6 Replies

Hi everyone! Looking for advice on how to save on taxes. Thanks for your help!!

Situation: Purchased a piece of land in NY this year with 3 people (Dad, Uncle, and I). We paid for the property by taking a HELOC on my dad's house and using the cash to pay for land in all cash. We pay ~$7,000 annually towards taxes on the property and paying off the HELOC. An energy company wants to pay us $7,000 a year to put a windmill up.

Goal: Put the land into an LLC so that we can offset the $7,000 in income by the $7,000 in HELOC and tax payments to effectively show $0 in net income. This would result in us not having to pay any personal income taxes on the $7,000 in windmill income.

Questions/Considerations: 

1) Can we take a rent expense for the LLC on the HELOC payments even though they are not in the LLC name?

2) If we did take this as rent expense, would my dad technically have to record that money as rental income even though its just automatically paying the HELOC?

Any suggestions/tips would be appreciated!

Situation: Purchased a piece of land in NY this year with 3 people (Dad, Uncle, and I). We paid for the property by taking a HELOC on my dad's house and using the cash to pay for land in all cash.

You may want to clarify for the sake of discussion. How did "we" (i.e. you, your Dad, and Uncle) buy the land by taking a HELOC on *your dad's* house? Did you and your Uncle own an undivided interest in your father's house? If not, it sounds a lot like we have a gift on our hands. Hopefully you discussed this transaction with your tax advisors. Gift tax returns are due April 15th.

Goal: Put the land into an LLC so that we can offset the $7,000 in income by the $7,000 in HELOC and tax payments to effectively show $0 in net income. This would result in us not having to pay any personal income taxes on the $7,000 in windmill income.

You're going to have an annual partnership return going forward, along with state and local returns.  Whether or not the business has the scale to absorb this administrative overhead is something you need to examine (1065s are no longer DIYable IMO).

You really should consult a tax CPA and asset protection attorney to understand your options and the steps you're currently taking but don't fully understand the ramifications of.

The other two questions can wait.

Originally posted by @Eamonn McElroy :

Situation: Purchased a piece of land in NY this year with 3 people (Dad, Uncle, and I). We paid for the property by taking a HELOC on my dad's house and using the cash to pay for land in all cash.

You may want to clarify for the sake of discussion. How did "we" (i.e. you, your Dad, and Uncle) buy the land by taking a HELOC on *your dad's* house? Did you and your Uncle own an undivided interest in your father's house? If not, it sounds a lot like we have a gift on our hands. Hopefully you discussed this transaction with your tax advisors. Gift tax returns are due April 15th.

Goal: Put the land into an LLC so that we can offset the $7,000 in income by the $7,000 in HELOC and tax payments to effectively show $0 in net income. This would result in us not having to pay any personal income taxes on the $7,000 in windmill income.

You're going to have an annual partnership return going forward, along with state and local returns.  Whether or not the business has the scale to absorb this administrative overhead is something you need to examine (1065s are no longer DIYable IMO).

You really should consult a tax CPA and asset protection attorney to understand your options and the steps you're currently taking but don't fully understand the ramifications of.

The other two questions can wait.



Eamonn - Thanks for the reply. In terms of this being treated as a gift, I'm not sure. 


My parents took out the HELOC and then bought the land using the cash but all 3 of our names are on the title (dad, uncle, and I). All 3 parties are now paying down the HELOC and once it is fully paid off we would each own 1/3 of the land. Regarding a gift, the land was purchased for $62,000 so even if were considered a gift I believe my uncle's share and my share ($20,000) would be under the gift exclusion amount of $28,000 (for mom and dad). The way we viewed it was, my parents technically owned the property outright and we were paying down a loan on the land financed through them rather than a bank.

Regarding the filing of partnership tax returns, one of us already has an LLC right now that currently has no holdings, no income, no expenses. We would all become partners in the LLC and transfer the deed for the property into the LLC. The LLC would then claim the income from the windmill and the "rent" payment for the HELOC. These would essentially net to $0 net income so rather than each of us having to claim 1/3 of the $7000 income, we would have pass-through income on K-1s from the LLC showing $0 taxable income.

@Daniel Dunnigan It sounds like your Dad borrowed money from his HELOC and then loaned that money to the partnership to purchase the land. If the partnership is paying back the loan from the HELOC, then it's technically paying back your Dad, plus interest. The partnership could deduct the interest paid to your Dad. Your Dad would recognize the interest income from his loan to the partnership and then deduct the interest paid to the HELOC on his tax return (assuming that he can itemize). You should discuss this situation with your CPA and possibly an attorney to make sure you document the transaction properly.

Even if you keep the transaction as a gift, then you still should get with your CPA and attorney to document the transaction property.

You can move the property into an LLC. This adds some liability protection for the three of you, but does not change the tax situation.

Based on the numbers you have given above, you will still have some income to report, which will be rental income. You'll receive $7k in income less property taxes less the interest on the HELOC (if you set this up as a loan from your Dad). You cannot deduct the principal payment, unless you treat the entire HELOC payment as a rental payment to your Dad (in which case you and your Uncle are pushing all the tax liability to your Dad, instead of the three of you sharing that cost.)

Sit down with a CPA to discuss the different scenarios and which one works out the best for all three of you.  Your CPA may also come up another strategy that differs from any discussed above.