Discussion:Rental to a LLC Trust
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Discussion Forum Index --> Advanced Tax Questions --> Rental to a LLC Trust
Discussion Forum Index --> Tax Questions --> Rental to a LLC Trust
| 4 December 2009 | |
| I have a new client that purchased investment property to fix up and than resell for a profit, original price being $75,000. Her son was staying at the home and providing much of the labor for her. He decided that he wanted to purchase the home instead, to live in, and he would get a mortgage to pay her back. He couldn't get a mortgage. She converted it into a rental property to him and her previous accountant has treated it like a rental property, taking depreciation for 4 years now. The son maybe has paid $1000 a year for rent, (not by her choice, but she also has not kicked him out), so the rental has had huge losses every year, because she pays for everything. Just last month, she decided to pay off her loan out of her family trust that was established when her husband passed away, approx 65,000 left on the mortgage note. She went to a lawyer and is having the house put into an LLC that the trust owns. She would the like FMV of $95,000 deducted from the sons portion of his inhertance. Any future payments the son makes the lawyer told her to consider interest income. My question is, should their be any recapture of the depreciation now, or use it when figuring the basis when she passes away and the son inherits. And is showing any future income as investment income the right choice? | |
| 4 December 2009 | |
| I shall leave the discussion of why this was never a rental property to others. So far as the inheritance is concerned, so long as the trust owns the house and all children share equally whatever the fmv of the property is at date of death merely becomes part of the distribution. There is no need for separate language. If the kid wants the house the value is part of his share. The trust paying off the mortgage and taking title to the house is problematic and needs review by a tax attorney. At the very least you would have a reportable gift of future interest. At worst the trust becomes at least in part includable in mother's estate. Many other possibilities in between and continued use and future payments by son complicate the issues. | |
| 4 December 2009 | |
| In the first part of this activity, it would be hard to defend treating this as investment property. Son didn't pay rent nor did he declare compensation income in the barter of rent for labor correct? Personal use by a family member is enough to preclude treatment of interest as for an investment and it would be personal non deductible interest. If son was her dependent possibly second residence interest. Any eventual profit would still be a capital gain since even personal use propery can yield that result.
In the second part of this activity, it would also be hard to defend status as a rental property since rental income was not for a reasonable amount. An auditor could determine the uncollected FMV rent was taxable and a non deductible gift to the son. Or throw out the rental property losses altogether. If a rental activity was proper, the depreciable basis at the point it was converted was its then current FMV, not necessarily the same as her cost basis. Any loss from purchase plus improvement costs to date of conversion became non deductible. Putting a rent house into an irrevocable family trust is a gift by your TP and a gift tax return must be filed. Its gift tax value is its FMV (subject to its debt) at the date of the gift. There is no depreciation recapture from making a gift. The LLC would be a disregarded entity and merge its tax numbers with other transactons of trust assets for tax reporting. Using the LLC to own the property is for legal liability protection I'm sure. Gift rules apply to the property basis when placed inside the trust. In general, basis and accumulated depreciation carry over. When sold, gift rules determine reportable gain or loss. The property will be either a vacant investment property held by the trust, begin to be a rental property inside the trust with FMV rent paid, or structure a sale to the son. Since the attorney mentioned interest income on future payments from the son, sounds like structuring an installment sale from the family trust to the son is what he has in mind. Satisfaction of any outstanding debt on that sale probably will use up part of what the son is entitled to from any share of the family trust down the road. Depreciation recapture will need to be considered when this sale is transacted. | |
| 4 December 2009 | |
| The gift (if that is the attorney's determination) would be the §7520 residual value. Other possibilities include allocating grantor status or simply using document language to take a distribution to pay off the mortgage and placing the house in a new trust. This is presumably a credit shelter trust with income to surviving spouse. The problem with treating such as if it were your own asset is that the IRS might agree with you...♫ | |
| 4 December 2009 | |
| So the attorney determines if this is considered a gift? The family trust is in place due to her husband passing away. She has remarried and would like to keep things separate from him because she wants her kids to have what is entitled to them. My question would be why a new trust? | |
| 5 December 2009 | |
| I believe Dennis is concerned that the family trust was set up to keep some assets out of her estate value, and that the transactions could cause the assets to revert back increasing that value. | |
| 5 December 2009 | |
| It originated back in 1995 as a irrevokable living trust set up by the ladies first husband. He owned a business and several buildings. When he passed away in 1998, the limit back then was only $650,000. He had several life insurance policies in place. One to pay off his business partner, one pay off his buildings and the remaining to take care of her. She tells me that the business and building were kept out of the trust and the only thing that went into the trust was the life insurance polices in the amount of $650,000. They kept the business out so that the bank couldn't control the assets. In 2000, she had her attorney take the bank, Fifth Third, to court so she could gain control of the trust. A new trust was set up with the funds invested in Raymond James. It is a pass-through entity and until she took out money to pay off this house, the cash hasn't been touched. What do you think? | |
| 5 December 2009 | |
| Sorry, but from the way you describe this I think you have not a clue. Now it sounds like once upon a time there was an Irrevocable Life Insurance Trust that was terminated through a court procedure. If the "new" trust falls under the grantor rules there may be no gift. Your client deserves a complete understanding of what she has and how it fits into her general estate plan. Refer her to someone competent. | |
