Settlement proceeds in personal name, expenses in LLC name

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Settlement proceeds in personal name, expenses in LLC name

Heath DonnaldPro Member
Rental Property Investor · Hershey, PA · Member since 2017 · 9 posts · 2 votes

My wife and I are partners in an LLC that just sold a flip. The expenses were paid from the LLC account for the 14 months I worked on the house. The house was in my name, not the LLC, so the settlement proceeds had to go to me and a personal checking account. Do the proceeds need to be deposited into the LLC account before paying off debts, or does it matter for tax purposes? Was this a rookie mistake? Should the house have been quit claim deeded to the LLC before the sale?

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  • William Harris
    Member since 2021 · 25 posts · 5 votes
    5y

    Good morning Heath,

    From my experience, it seems like you will be hit with capital gains tax on your proceeds when you file your personal taxes. Unless you did a 1031 exchange with the profit, you will get taxed. Moving that money into your business account would help you pay off debts of course, and that will also help with your overall business account activity. 

    You can fact check this and see if the process is still the same 🤝

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Heath Donnald:

    My wife and I are partners in an LLC that just sold a flip. The expenses were paid from the LLC account for the 14 months I worked on the house. The house was in my name, not the LLC, so the settlement proceeds had to go to me and a personal checking account. Do the proceeds need to be deposited into the LLC account before paying off debts, or does it matter for tax purposes? Was this a rookie mistake? Should the house have been quit claim deeded to the LLC before the sale?

    What's done is done. You have to make sure that your bookkeeping is done correctly to reflect the house in the partnership first. Contribution needs to be made and your capital accounts needs to be established. Also, yes deposit the money in the LLC's to record the proceeds.

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  • Heath DonnaldPro Member
    OP
    Rental Property Investor · Hershey, PA · Member since 2017 · 9 posts · 2 votes
    5y

    @Ashish Acharya Thanks so much for the info.

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  • Heath DonnaldPro Member
    OP
    Rental Property Investor · Hershey, PA · Member since 2017 · 9 posts · 2 votes
    5y

    @William Harris Thanks. I wish I could’ve 1031. Tax hit should be too bad though.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    It’s a flip.....taking more 12 months doesn’t make it capital gains, it’s ordinary income plus self employment ss/med taxes.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Heath Donnald

    What you did is incorrect and a little bit messy.

    The owner of the property(whoever is on title - you or you and your spouse) should be making the payments for materials/rehab/etc.

    Your purpose for creating the LLC was liability protection - you should consult with your attorney but you likely didn't take the proper steps to get the liability protection afforded by the creation of the LLC

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  • Heath DonnaldPro Member
    OP
    Rental Property Investor · Hershey, PA · Member since 2017 · 9 posts · 2 votes
    5y

    @Basit Siddiqi Thanks. I agree with the “little bit messy”. I was more worried about keeping business and personal expenses/accounts separate than the liability aspect. I’m working on improving my chart of accounts and funding stream for next time.

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