Discussion:Real Estate 1065 Question
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Discussion Forum Index --> Tax Questions --> Real Estate 1065 Question
| 22 January 2007 | |
| I know that partnerships are required to file a 1065 unless they can claim and exemption under section 761a of the tax code. A potential client of mine, however, has created multiple LLC's that invest in real estate and has never filed a 1065 for any entity (I'm not even sure if he has EIN numbers for any of the entities). I was wondering if he would have to go back and file 1065's for the many years he hasn't filed anything (starting in 2002). I know he isn't going to want to do this because there could be large fines involved, but I want to best advise him in the actions he needs to take. If you have resources that you are using to support your opinion, please let me know what they are so I can further research. Thanks. | |
| 22 January 2007 | |
| No, they have multiple members. From what I am told, they have claimed the income on their personal tax returns, and send out 1099's to their investors so they know how much income to include in their 1040. | |
| 22 January 2007 | |
| Yes, they basically set-up an LLC for each real estate deal, and get money from "investors" who become members of the LLC. From what I gather, they only give out 1099s for tax purposes currently. | |
| 22 January 2007 | |
| You are correct, they should be filing Form 1065 and giving out a K-1, not 1099s to the members, because they are a multi-member LLC. If the LLC elected corporate tax status, they would file either 1120 or 1120-S. | |
| 22 January 2007 | |
| So, would I have to go back and file 1065's for all the prior years? | |
| January 22, 2007 | |
| Although it may be a little expensive, it is probably a good idea to file the returns to (at least) start the meter on the statute of limitations. That being said, you do have options. Sec. 6698 provides that the failure-to-file penalty may be waived if reasonable cause is demonstrated. Given that the LLC members reported their income, this doesn't seem like a case of "willful neglect" or fraud. In addition, Rev. Proc. 84-35 provides that any domestic partnership with ten or fewer partners that comes within the exceptions provided in Sec. 6231(a)(1)(B) (i.e., only individual, C corporation and estate partners; a husband and wife count as 1 partner) will be considered to have met the reasonable cause test and will not be subject to the failure-to-file penalties if it establishes that all partners timely reported their full shares of all partnership items. Accordingly, if your LLC's have fewer than 10 partners, the partners have timely reported their income on their individual returns, and none of the partners are passthroughs or trusts, you have reasonable cause and should be able to get any failure-to-file penalties waived.
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| 22 January 2007 | |
| Of course, then you need to amend all of those wrong 1099s. They shouldn't have to claim income from both a K-1 and an incorrect 1099. | |
| January 22, 2007 | |
| If the income has already been reported properly, I would hope that any "amending" of returns could be avoided - but, maybe not.
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| 22 January 2007 | |
| You might get more business amending the 1040s which you will need to.
There are also penalties for failure to issue K-1s. I think it is $50 / partner per month for 6 months or to a maximum threshhold amount from the IRS (please check with IRS.GOV). | |
| 22 January 2007 | |
| Let's say they did elect out of partnership taxation under 1.761-2. When the real estate is sold, who will get the 1099-S? Each "owner"? The LLC? If it comes in the name and ID number of the LLC, what are they going to do then? | |
| January 22, 2007 | |
| As long as all the prior income and expense was reported, I think I'd call it moot and start filing LLC/1065's now... | |
| 22 January 2007 | |
| Hey, Mmckamy - I've got some other clients for you ha ha! See Discussion:1065 Filing Requirement ... | |
| January 22, 2007 | |
| Kevin: As I understand the facts, each investor is currently receiving 1099's for their share of the income, why would the sale be reported any differently? Assuming they did elect out, I would think such sale would be reported no differently then a tenancy-in-common arrangement (each investor owns an undivided percentage of the property), which is pretty much the same as it is now. Based on the facts provided, it is not clear that LLC's were ever formed (the poster does not even know if there there are Tax ID's for the LLC's); accordingly, under the current facts it's not clear how title is held.
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| 22 January 2007 | |
| FTF, I agree - the attorney in that example would make 4, 5 or however many 1099-S forms were required and each owner would report his share of gain by comparing his basis. The problem I see is that someone says "NO, don't give me a 1099 - give it to the LLC, because the property is in the name of the LLC". Now how does the LLC go about gathering basis from each member - some of which may have written off things that should have been capitalized along the way? | |
| January 22, 2007 | |
| Kevin - good point - my presumption was that the person tracking the income (for purposes of issuing 1099's) is also tracking basis. That may not be a good presumption. Maybe we will get some additional facts... | |
