Can I buy Real Estate with another LLC's profits?

Question

Hi there, my question is really around taxes, I'll admit it is not my strong area and I do have an accountant that I will advise but figured I would see what discussions are generated here.

So for my example, I have an LLC that is generating profit and I would like to purchase some multifamily investment properties with that money. However, I would like to do that without paying taxes on it before I buy. Say if I formed a second LLC for purchasing the properties is there a way to use the first LLC's profits to purchase properties with the second LLC without paying taxes? Legally of course. For example, what if the second LLC is owned by the first LLC?

Any thoughts?

Kevin Mckinley · Answer

what if the llc is a group home and you want to buy more property to grow your group home business. Would that work?

Erik Sell · Answer

From a tax perspective technically equipment purchases should be carried as an asset on the books and depreciated over 5-7 years (depending on what type of equipment purchase).  If we're talking smaller items (less than $500) or repairs on equipment you definitely just run that through current year expenses but really larger items should be capitalized.  You don't lose any deduction by capitalizing and depreciating an item you just have to take the expense over a number of years.  Often a moot point with the Section 179 expensing deduction but good to have an understanding of this or at least be in contact with a pro.

Real estate definitely has the much longer depreciation lives (27.5 or 39) and of course land not depreciating at all.  Since they're different classes of assets you wouldn't be able to use 1031 treatment to defer gain by selling equipment and buying real estate.

Kris Lippi · Answer

Thanks guys, what you are saying makes sense to me.

So from a tax perspective, real estate would be treated completely different then say an equipment purchase for the business where I could deduct that from expenses?

Erik Sell · Answer

I'm a CPA and I think Jerry is right on the money.

If you've got net income from your LLC that flows through to your personal return you have to pay taxes on it, no way to get around that (if someone can come up with an idea how you could I would love to hear it).

As Jerry mentioned a 1031 is really your only option.  But to do that you would have to have an asset in the LLC to sell and then invest it in like-kind property to get 1031 treatment and defer the taxes.  If you ever went that option get some professional help before you do it as there are very strict rules and deadlines in order to qualify for this.

Jerry W. · Answer

You can deduct expenses from income, but you do not usually get to defer taxes just because you buy another property.  In an LLC the profit and losses are passed directly to the owners, usually with a K1.  That is assuming you elected to do so, and most folks do.  I think your profit is taxable, unless you are selling an asset and taking the profit from the sale to do a 1031 transfer to defer your capital gain by reinvesting.