All Forum Posts by: Eamonn McElroy

Originally posted by @Eamonn McElroy:

Whether or not the transaction will be respected depends on how the LLC is tax...e.g. disregarded entity, partnership, S Corp, etc.

It's a valid strategy to sell the raw law to a development entity.  There are a few landmines that a tax advisor should go over, and one or two of the steps you listed could be eliminated or done differently.

For some reason I can't reply directly to you.

In that situation, a transaction between you and the disregarded entity (such as a sale) would generally not be respected for federal income tax purposes.

What we generally need is a partnership, S Corp or C Corp.

I work with similar fact patterns and we usually see a landbank or similar company acquire raw land, then later sell to an S Corp for development.  This allows appreciation between acquisition and when development starts to be treated as a capital gain, and the development entity gets a stepped up basis in the asset.

A similar arrangement might work to allow you to use a partial Sec 121 exclusion.  But it's hard to tell because there are a lot of details left out.  Also hard to tell if the juice is worth the squeeze.

There's a few different ways you could go about structuring this arrangement.

Either tenants in common or via an entity such as an LLC or LP. If you're already looking into a written agreement, then it might make sense just to go the entity route.

In that case, you would generally want to hire an attorney to draft the operating/partnership agreement, as these are state law entities that operate based on state law.  A boilerplate template or example is definitely the cheap route to go, but it's not the best route.  Furthermore, an attorney and tax advisor worth their salt will bring to your attention certain things that should be in the operating/partnership agreement that you may not find in a free template, such as buy-sell agreements.

Your father could hold his interest through a revocable trust of which your brother is beneficiary.  Although doing so may have current and future tax and non-tax ramifications that need to be explored along with his estate and gifting plan.

A multi-member LLC or an LP will generally be taxed as a partnership and would file a Form 1065 annually. Those are not for the faint of heart and are no longer DIYable IMO. There may also be state and local ramifications. For those reasons it may make sense to talk to a tax advisor and business attorney at the outset.

Whether or not the transaction will be respected depends on how the LLC is tax...e.g. disregarded entity, partnership, S Corp, etc.

It's a valid strategy to sell the raw law to a development entity.  There are a few landmines that a tax advisor should go over, and one or two of the steps you listed could be eliminated or done differently.

Originally posted by @Eamonn McElroy:

Keep is mind that the cash that you walk away from closing with often does not reflect your capital gain.  Cash from closing is generally gross sales price less selling costs less mortgage(s), whereas tax gain is gross sales price less selling costs less tax basis.

It is possible your tax gain might be less than you think.  A tax advisor should be able to calculate this for you and run a rough projection.  With a little bit of research you might be able to as well.

If this was a rental and you have accumulated passive losses, they may offset the gain.  A Qualified Opportunity Fund has been mentioned.  If the property was unmortgaged, an installment sale may have made sense.  Harvesting unrealized tax losses on portfolio assets may make sense, but you and/or your financial advisor should be cognizant of wash sales.  Purchasing a new rental property, putting it into service before year-end, and doing a cost seg might also be very powerful.

Those are just a few of the most common ideas.

A fully engineered cost seg will run a few thousand.

There are less expensive options however.  Pros and cons.

Originally posted by @Rob C.:

@Eamonn McElroy, You addressed this topic here in a related thread by saying:
“Inserting a trust between the LLC and you as "manager" of the LLC does not change this. Who is the trustee of the trust? You are, most likely. Where are you located? California”

For starters, this is making an assumption about the trustee that I did not intend in my original post. However, I'm not sure that even matters. What gives you the opinion that the location of the trust depends only on the location of the trustee? This seems to conflict with the published opinions of @Scott Smith

Rob,

We can only assume that you were referring to a revocable, living trust in your original example above. This is a logical assumption to make as you used the word "passthrough" to describe the trust. Technically, a revocable trust is a "disregarded entity". It is also logical to assume that you as grantor would also be trustee of your revocable trust while you are alive. Even single revocable trust that I have seen names the grantor as the initial trustee (i.e. you). Anything else means that you are ceding all management control of the trust (and the LLC) to another individual in a bona fide manner. Perhaps you were not aware of this dynamic or you are not familiar with trusts and how they operate.

What matters is where management of the LLC is performing their duties for the issue we're discussing. If a trust is designated as manager and/or managing-member of the LLC, we look to the trustee(s) and where they physically perform the majority of their management duties as it relates to the LLC.

I have only skimmed the article by Scott Smith, and based on that skim what I'm stating does not conflict with his article.  I'll also state, respectfully, that an online article is not authoritative guidance.  I'll continue to look forward to you providing authoritative guidance for your arguments.

The high level issue at play in this thread and the major impediment to what you're trying to accomplish is "commercial domicile" as it relates to CA. This is not a new issue but rather has been fully explored in the CA courts over the last 50 years as the CA corporate franchise tax predates the CA LLC tax and both have commercial domicile as a component of their respective nexus tests. As a resident of CA, there's no way to avoid commercial domicile in CA without ceding control of the LLC in a bona fide manner to an individual or individuals physically located outside of the CA. I have already offered two on-point court cases on the issue in the "related thread", which it appears you've partially dismissed in that thread without even reading. If you reject these court cases, or think they're offpoint, I don't have anything else to add and will wish you the best of luck.

Originally posted by @Eamonn McElroy:

I just don’t like seeing folks misled by oversimplifications from posters pretending to know the full story.

I don't think Chris is misleading anyone...  Are you provide any authority or case precedence for your position?  I did not see you provide anything in the other thread other than colorful argument and, in essence, "prove me wrong".  If the CA FTB contests your position, you'll need a lot more than that in court as the burden of proof is on you and your advisors, not the CA FTB.

A foreign LLC (as it relates to CA) that has a manager physically located in California is indeed doing business in CA as that is both the general definition and the definition adopted by the CA courts of "commercially domiciled in CA". See CA RTC Sec 23101(b)(1), Appeal of DPMG Juniper LLC (OTA Case 20035914), Appeal of Norton Simon, Inc. (1972 WL 2642), and Appeal of Vinnell Corp (1978 WL 3943).  Those are all authoritative sources.

Inserting a trust between the LLC and you as "manager" of the LLC does not change this. Who is the trustee of the trust? You are, most likely. Where are you located? California.

There are ways to avoid nexus with CA for an LLC owned by a CA resident, but it is most often not feasible as it generally requires ceding all control in a bona fide manner.

Rob, most people can't remember what they had for breakfast three days ago.

It's a little unreasonable to expect people to remember something that you posted over six months ago...

I'd love it if you could repost all of the citations for your authoritative guidance.  CA R&TC and court cases.  Not online articles or information from the CA FTB website or pubs.  The latter is not authoritative.

Keep is mind that the cash that you walk away from closing with often does not reflect your capital gain.  Cash from closing is generally gross sales price less selling costs less mortgage(s), whereas tax gain is gross sales price less selling costs less tax basis.

It is possible your tax gain might be less than you think.  A tax advisor should be able to calculate this for you and run a rough projection.  With a little bit of research you might be able to as well.

If this was a rental and you have accumulated passive losses, they may offset the gain.  A Qualified Opportunity Fund has been mentioned.  If the property was unmortgaged, an installment sale may have made sense.  Harvesting unrealized tax losses on portfolio assets may make sense, but you and/or your financial advisor should be cognizant of wash sales.  Purchasing a new rental property, putting it into service before year-end, and doing a cost seg might also be very powerful.

Those are just a few of the most common ideas.

If it is your tax return's only profession and only source of income, the minimum annual hours may not apply.

The 750 hours annually is used by the IRS in cases where real estate is NOT the only source of income on a tax return, to avoid fraud.

Just to clarify for future readers, this statement is not correct.  The RE pro two-pronged test is codified and there is no interplay with other income outside of real estate.  It is completely possible that a taxpayer may not be a real estate pro even if their only activity and source of income is real estate if they fail the 750 hour prong.  Particularly possible if the day-to-day is managed by a PM.

There is a lot to consider.  Entity structuring (from both a legal and tax perspective), compliance obligations as it relates to the US and the foreign country, US and foreign estate tax exposure.  You're wise to seek out professional help.  It isn't an area that should be DIYed.

There are a few tax advisors on this subforum who have made a niche out of it.  My advice is to read historical posts (using the search bar), jot down a few names, and reach out.

It's very unlikely that a dependent child will be an IC as opposed to an employee when working for the parents if we do a facts and circumstances analysis.  It is even moreso unlikely under OP's state law with the newly enacted California ABC Test...

Furthermore, the FICA exemption applies only to W-2 wages.  If you take the position that the child is an IC you are implicitly taking the position that they will pay SE tax (and file a return) if the applicable thresholds are met, as there is no such exemption from SECA for a dependent child.