Posted by JPiper on January 19, 2000 at 24:43:30:
Thanks for your further explanation.
What I gather from this is that you were discussing an actual situation, which contained facts that you left out of your original post. I gather that the belt that connects to the pulley which turns the wheel which eliminates the need for a crank was the part I missed! Just kidding Ray. But evidently you left some important facts.
So allow me to just reiterate a few things here. I called my CPA today to ask about the transfer of a property to an entity which in the near term did a 1031 exchange. He was adamantly opposed to the risk of this?.as I suspected he would be. Let alone your original suggestion that the property be deeded to a corp, a 1031 exchange, and then deeded to an LLC. That one drove him wild?.again, as I figured it would. As you know, we can all do pretty much anything we want?.the only question is whether it will stand up on audit. It sounds as if your opinions on what works have not been audited as of yet. In my case the way I would approach this is to see what I have to gain considering the risk of the undertaking. In this case, and in the absence of all the facts?it?s difficult, if not impossible, to see what?s to be gained in such moves by either you or Millie.
Let?s go back to the numbers. I used $50K as the income. You?re quite right?interest expense would need to be deducted. But to compare this we would simply deduct from all the entities with which we are comparing?so it becomes a constant?and therefore that factor is irrelevant. We probably would have other deductions as well?.but they will be constant in what we compare?so therefore it?s not particularly important what the specific number is that we use, as long as we use the same numbers for comparison.
So again?.let?s say the net income from the property is $40K if that makes you feel more comfortable. Let?s say the depreciation is $17K.
Your assumption is that the LLC owns the property. So in this example, the LLC pays $40K to the C corporation as manager?.that is what you said isn?t it? This leaves the LLC with a $17K loss?which passes through to the partners on their personal return. Now the C corporation has a profit of $40K. If that $40K is paid out in salary?the partner has $23K in income subject to personal rates?..AND will have created a social security liability on both the corporation AND the partner. IF you pay the net of $23K out in dividends?it?s subject to tax at the corporate level AND at the personal level. If you attempt to keep in the corporation and subject to the 15% corporate rate?.you?re looking at personal holding company treatments.
Now compare this to holding the property in just the LLC?no corporation involved. There is $23K income which flows through to the partners. No double taxation, no social security tax, no personal holding company consideration. Any way you slice this particular comparison, the latter comes out better.
Ray, if you assume even larger deductions for interest?all that happens is that more is deducted at the LLC level?and less paid to the corporation?which reduces the problems faced at the corporate level. But this structure still loses when compared to the straight LLC.
Now Ray, you can complicate this further by injecting other activities into this corporation. That may be true of your situation, but whether it?s true of Millie?s is something I have no information about. But in reality, whether you are looking at your situation or Millie situation, coming back to basics of the above scenario is worthwhile and helpful.
Millie says she doesn?t want the income on her return. But Ray, did you ask why? We don?t know the answer to that question. But my guess is that she would just like to pay less tax. Do you really think that Millie is going to be content to get that income off her return at the cost of higher taxes?
Ray, are you able to take my above simple examples and show how one REDUCES taxes by moving income to the corporation? And for the purposes of any illustration that you may care to make?.let?s assume that Millie wants her money, just as she would have had if she had organized under just an LLC.
Finally, a personal opinion. The most complicated situations I have been exposed to, the ones I had the most difficulty understanding?.were generally speaking the ones that cost me or lost me the most money. Actually I?m beginning to believe that your scenario really isn?t all that complicated?.but on first reading it successfully passed the ?eyes rolled back in the head? test.