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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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I became totally and permanently disabled after a working for 44 years. I returned to college late in life (while working full-time) to fulfill my dream of becoming an RN and at that time found it necessary to secure student loans. Three years after being declared totally and permanently disabled my student loans were discharged. In January 2013 we received a 1099-C form declaring said student loans that were discharged however that amount could be considered as income for 2012. This was a large amount of money and we live on two pensions and social security income.

I started looking on the internet for information regarding 1099-C and felt that this was something that we could not handle alone. I made phone calls locally to a very reputable tax group in a city near us and they said it would cost $500 for an appointment and that they really prefer to do corporate taxes and they referred me to a local person who had worked for them at one time, we called and explained the situation and an appointment was made and then the comment was made that "I will have to do some research on this" and flags immediately went up and we called back and cancelled that appointment. I had been researching the IRSwebsite and every place else I could think of and I was not comfortable doing our own taxes this year. We called another local tax preparer that we had used in the past and made an appointment, however prior to the appointment, while still seeking information regarding our situation,

I came across a website for Gary l. Bode, MSA, CPA, PC in Wilmington, NC. I called Mr. Bodeand explained our situation and asked if he could help. He spoke very knowledgeably regarding the situation and stated that yes; he felt he could help us. As Mr. Bode was in North Carolina and we were in New York I scanned all of our documents including back-up documents for all of our claims and forwarded all to him. Mr. Bode kept in touch with us via email; we have spoken on the telephone several times and have become very comfortable with his knowledge and professionalism. Also, as I am a true "worrier" I have continued looking into information regarding our tax situation and I came upon another web page for Mr. Bode that included testimonials which spoke of his experience with this type of tax situation as it became prevalent during the recession. This reinforced in our minds that we had made the right decision in hiring this person as our tax preparer.

I share all of this as our taxes are now ready to be filed (we do owe tax for 2012 but not the astronomical figure we thought we were facing), and we are confident that they have been prepared with the utmost care by a gentleman who has an excellent working knowledge of the situation we faced and the tax laws that were applicable to said situation.

 

Bill and Carol

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Rental Property CPA discusses Form 4797 | Rental Property Sale Resulting in a Loss for a LLC taxed as a Partnership

Rental Property CPA in Wilmington NC Discusses Form 4797

Gary Bode, CPA: if you need a free initial phone consult on a rental property or landlord tax issue, please call 399-2705.

Rental property CPAs earn their keep when reporting the sale of residential rental property on IRS Form 4797. My example uses a LLC that elects to be taxed as a Partnership; filing Form 4797, Form 8825 and Form 1065. This post helps conceptualize the tax issues involved. Losses were unusual before the Recession, but I expect more short sales and foreclosures in 2013. Like any IRS issue, there are lots of details and you can’t reasonably rely on this post alone. Other sources of information include:

  • IRS Pub. 946, How To Depreciate Property.
  • Instructions for Form 4797.

Designed for multiple purposes, the terminology and format on Form 4797 can intimidate clients. Where do you enter the figures on Form 4797? Exact placement on Form 4797 depends on;

  • Whether there is a capital gain.
  • Whether there’s a capital loss.
  • How long you, or your company, held the rental property.

“Even a rental property CPA finches at the complex IRS descriptor on Form 4797, Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)).” 
– Gary Bode, rental property CPA

Simplistic Example of Capital Loss Calculation

Flow of the LLC Partnership Tax Return

Form 1065

For this example, the business entity is Rental Property CPA LLC, being taxed as a Partnership on Form 1065.

  • The profit or loss from rental activities goes through Form 8825.
  • Each Member’s portion of rental activity profit and loss flows from Form 8825 to Line 2 of Schedule K-1 of Form 1065.
  • The sale gets reported on Form 4797, part 1.
  • In this case, the rental property was held longer than one year and resulted in a loss. The Member’s losses flow from Form 4797 to Line 10 of Schedule K-1 of Form 1065.

Member’s Form 1040

  • Rental profit and loss from Schedule K-1 flows to Schedule E and then into the Income section of Form 1040.
  • Loss from the sale flows from the Member’s K-1 to Line 14 of Form 1040 (other Gains and Losses).

Depreciation Primer

Land can’t be depreciated. So the cost of the land is segregated from the cost of the building and improvements. The cost of the building gets incrementally deducted on your annual Form 8825, through straight line depreciation over 27.5 years.

Example

  • On January 1st, 2009, Rental Property CPA LLC purchased a residential rental property duplex for $320,500.
  • Rental Property CPA LLC sold the duplex on December 31st, 2013 for $270,000. CPA’s closing costs on the rental property sale were $5,000. Land value did not change.

Purchase

  • Cost of land; $60,000. It’s best to have some justification for the land’s value e.g. tax listing, appraisal etc.
  • So $260,500 was for the building. ($320,500-$60,000).
  • Rental Property CPA LLC immediately put in $10,000 of improvements to the building.

Depreciation

  • On the annual Form 8825, CPA LLC deducted $10,000 depreciation on the building and improvements for 2011, 2012 and 2013. {($260,500 + $10,000) / 27.5 years }. Note that depreciation for the building still appears on the 2013 Form 8825 even though 2013 was the year of sale.
  • So total Accumulated Depreciation during the ownership of the rental property is $30,000. $10,000/year x 3 years = $30,000

Loss Calculation

  • Sales Price of Land and Building = $270,000
  • Original Cost = $320,500 purchase price + $10,000 Improvements = $330,500.
  • Add Back Depreciation = $10,000 x 3 years = $30,000 Accumulated Depreciation.
  • Less Sales Cost = $5,000
  • Loss = $270,000 Sales Price – $330,500 Purchase Price + 30,000 Accumulated Depreciation – 5,000 Sales Expense  = ($35,500).

Rental Profit and Loss on Form 8825

Rental Property CPA LLC still filed Form 8825 for 2013. Note the 2013 Depreciation appeared on Form 8825 and then got added back in the sale’s loss calculation.

Tax Implications

The technical term is Section 1231 loss. All Members of Rental Property CPA LLC were active in the property’s management. So the loss can offset ordinary income. If the loss reduces the Member’s personal taxes below zero, the unused part can be carried back two years by amending those returns via Form 1040-X.  If there is still unused loss, it can be carried forward 20 years. This post doesn’t cover passive losses, but be sure to ask your rental property CPA about them.

This post covers the basics, but some situations require additional IRS forms:

  • Use Form 4684, Casualties and Thefts, to report involuntary conversions from casualties and thefts. Like Superstorm Sandy.
  • Use Form 6252, Installment Sale Income, to report the sale of property under the installment method.
  • Use Form 8824, Like-Kind Exchanges if you’ve exchanged assets.

We’re a rental property CPA firm with a virtual office. If you like what you read, don’t let distance dissuade you. For a free initial phone consult, please call (910) 399-2705.

My experience includes being the controller for a luxury residential construction firm with 30+ rental property LLCs. During college I was the residential manager of a 52 unit residential apartment complex. My extended family owns rental property. So I stay current on landlord tax issues. And of course I prepare Form 8825, Form 4797, Form 1065 and Form 1120-S on a regular basis.

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