Capital gains or income tax?

[nadian68]

What is the name of your state? Indiana

My wife and I make approximately $65,-000 a year and we are going to receive approximately $110,000 from our share in a real estate transaction from a family partnership. Are we going to pay income tax on it or gapital gains? I am trying to estimate what my taxes will be.

[xylene]

Originally Posted by nadian68

What is the name of your state? Indiana

My wife and I make approximately $65,-000 a year and we are going to receive approximately $110,000 from our share in a real estate transaction from a family partnership. Are we going to pay income tax on it or gapital gains? I am trying to estimate what my taxes will be.

You have not really provided enough info for a complete answer. (What kind of transaction? What kind of partnership?)

Answer these questions:

Did you invest money in the real estate (IE outlay of capital) and are now realizing your gains thru sale?

Are you owners of land that that is being rented (rental income)?

Are you recieving funds as part of the sale of land as part of an inheritance or in the course of an estate settlement?

Are you selling land that was given in shares to your family upon inheritance of a settled estate, and have held the land for a period of time and are now selling (this relates to cost basis.)

[nadian68]

I own 22% share of a LLC that my father started. He gave each of his kids 22% of the shares and he maintains the remaining 12% as well as all of the voting shares. The company owns two commercial warehouses with one fully mortgaged. The last couple of years we have seen some rental income and were taxed on that as income. One of the building is being sold and each partner will get their percentage share of the proceeds but each of us never outlaid any capital. I just don't know what kind of income tax bracket this could put me into or if it counts as capital gains. i am going to try to invest some of the money before taxes are taken out to lessen the tax burden. Can the partnership pay taxes on the whole amount before each partner gets their share?

[xylene]

This is a large distribution.

You should talk to a tax pro to maximize your advantage..

If you are receiving distributions from ownership of shares of a family owned corportation then it would seem that this is income. (just like any dividend)

Word of warning I know nothing about the exact set-up of this real estate deal, the properties ownership, or your family company structure. This is why you need your own tax pro on this.

No one ever went broke from increasing income.

[tranquility]

Is the LLC a pass-through entity? What is the LLC's business? How many properties have been sold by the LLC? Do they do development of warehouses? These may affect the income-classification question.

"i am going to try to invest some of the money before taxes are taken out to lessen the tax burden."

Re-investing the proceeds will not affect your taxes. An individual member (or partner) cannot do a 1031 exchange on property sold by the LLC. When the member has this intent, they sometimes get the business to distribute the *property* (Or, the proportional part.) before the sale and exchange then.

[abezon]

The problem here is that you do not know how much of the $110,000 is basis (not taxable), capital gains (max 15% rate), or section 1250 recapture of depreciation (max rate of 25%). The LLC got your dad's basis in the warehouse when he transferred title.

Example 1: dad paid $400,000, claimed $16,000 depreciation, sold for $800,000, paid off mortgage of $300,000.
Taxable income includes cap gains of $400,000, plus depreciation recap of $16,000. Your share is about $100,000 & $4,000; your cash distribution is about $125,000. Your taxes are about $16,000.

Example 2: dad paid $400,000, claimed $16,000 depreciation, sold for $500,000.
Taxable income includes cap gains of $100,000, plus depreciation recap of $16,000. Your share is about $25,000 & $4,000; your cash distribution is still about $125,000. Your taxes are about $4,750.

Example 3: dad paid $400,000, claimed $300,000 depreciation, sold for $800,000, paid off mortgage of $300,000.
Taxable income includes cap gains of $400,000, plus depreciation recap of $300,000. Your share is about $100,000 & $75,000; your cash distribution is about $125,000. Your taxes are about $33,750.
Note that you paid taxes on $175,000 of income but received only $125,000 cash.


I hope that this gives you a framework to ask your dad some intelligent questions. Just be sure to save your expected tax bill and a bit extra until you get your taxes done in April. You don't have to pay the tax bill until April 15, so earn some interest on the money until then! There are some lots of money market/online savings accounts that pay over 5% interest right now. I found this site with google: [url]http://www.money-rates.com/cdrates.htm[/url]

[xylene]

I have to say that I think you are wrong abezon.

You are confusing the tax consequences for the corporate balance sheet with the distribution from the corporation share.

That potentially makes all 110,000 income.

[tranquility]

The LLC and the personal are different questions--especially when we don't even know how the LLC is taxed. To actually determine the tax burden on the distribution requires a number of other facts as abezon shows. There are other issues as well. For example, what was the OP's basis in the LLC? Does the distribtuion consist solely of the capital gain on the property? What was done with the rest of the money?

Seeing a tax professional from a personal standpoint is important, but will only aid compliance. Seeing a tax professional now for the LLC is important for how the transaction is described and how the K-1 will come out. Seeing a tax professional *before* doing complex things like this is the best way to save money.

[abezon]

Originally Posted by xylene

I have to say that I think you are wrong abezon.

You are confusing the tax consequences for the corporate balance sheet with the distribution from the corporation share.

That potentially makes all 110,000 income.

Umm, this isn't a corporation. A Limited Liability Company is taxed as a partnership (pass-through entity) unless the LLC elects to be taxed as a corporation. Even then, the LLC almost always elects to be taxed as an S-corp (also a pass-through entity). Since the poster referred to the LLC as a family partnership, & mentioned paying tax on the rental income as ordinary income, this is a partnership or possibly an S-corp situation & pass-through treatment applies to the distributions. (If it were a corporation, the past distributions would have been qualified dividends & taxed like capital gains.)

At any rate, the point of my post was to demonstrate why no one can answer the poster's question, & to show what types of questions the poster should ask papa.

As I mentioned earlier, if for some crazy reason the LLC elected to be taxed as a corporation & did not file an S-corp election at the same time, all the distribution would be qualified dividends (or possibly return of captial) & would be taxed as long term capital gains. Maximum tax = $16,500.