Not sure how to handle this situation with a family LLC

[jjtrcka22]

The mother of this family owns the property (which is currently rented). She was unable to handle it herself, needed repairs done on the house, and could not get a loan on her own. The three siblings formed the LLC to get the loan and manage the property. The mother is not part of the LLC or a party to a loan that the LLC got. The bank allowed the loan, with the house as collateral, by means of a contract of sale that said the mother would not sell the house to anyone else, and the deed would pass to the siblings (LLC) upon her passing.

The contract also says that in the meantime, the LLC is responsible for managing the property. Any annual positive rental profit after all expenses and debt service goes to the LLC (as well as any losses). The contract also stipulates that LLC provides deed holder (the mother) with an annual statement showing all income / expenses for her tax return.

This is pretty much right out of the contract. If anyone has any input on the best way to treat this, I would greatly appreciate it. This is definitely a new one for me. Thanks!

[IRonMaN]

Who is collecting the rent and paying the monthly expenses - mom or the LLC?

[jeffmcpa2010]

Well I really wanted to say "tell the attorney who wrote the contract to do the tax return", but that probably wouldn't have helped.

Ok. I don't believe that there will be any reporting of the rental activity on the Mother's return. I am not sure if she has actually sold the property at this point, but it seems like she has given up the right to have any control over the property, or to have any "financial interest" in the activity on the property.

I think the LLC needs to file a tax return (partnership unless other election made) with k-1's to each of the siblings. If the siblings have also personally guaranteed the loan, then it would be a recourse loan, giving them basis in case of losses.  I have not, in my mind, determined if I think the LLC has actually purchase the property, giving them basis and allowing them to take depreciation, or whether they have merely acquired some kind of right to "use and control" of the property.

The last sentence also applies to "Is there a sale that needs reported on the Mothers Return?' If there is, would the sale be reported as an installment sale, if so there are no payments to the mother so possibly no effect anyway,(unless there is some 1245 property recapture in the year of sale.) Or is it actually a fancy of disguising a gift, to try to get a step up basis at mothers death?

I am pretty confident that I could defend not reporting any of the rental activity on Mother's return. And that a return need filed for the LLC with the rental activity. Everything after that get's pretty speculative.

[qbteachmt]

This is conflicting: "Any annual positive rental profit after all expenses and debt service goes to the LLC (as well as any losses). The contract also stipulates that LLC provides deed holder (the mother) with an annual statement showing all income / expenses for her tax return."

There is no sale here. It seems more like a strategy to co-sign but not actually lien the property which was put up as collateral. It's weird, but it might be fine in that State, legally.

However, the LLC cannot both have the Profit, and the mother have the Gross Details. Only one entity has the Gross Rent and related Expense. They really have to decide, then, if the LLC is simply a manager (even though they handle everything) or the mother is subletting to them. Because it's pretty obvious the mother is not participating (passive vs active).

Here's what I see around here, recently: You lease property from a bunch of owners, then you rent it out on AirBNB or VRBO and do all the tenant servicing. You are not managing it for the owners; you get the rental income and incur the expense and get to profit. The owner will have their lease income and some related expense, but not from occupancy turnover.

[qbteachmt]

Oh: that means the repairs would be more like Leaseholder Improvements, and not for the mother to track and not part of basis in the real property. Sheesh.

[BobKamman]

Sounds like old wine in new bottles -- Mom gets her nursing home paid by the taxpayers, while kids get to go on a cruise.  I would guess that this is some Eastern state with archaic property laws.  It allows a contract that says "I don't own the house, but you have to pay me the net rental income until I die."  

The bank accepted the house as collateral for a loan to the kids, because the kids now own it.  Theirs are the only names on the mortgage, right?  And you're the mother's tax pro, right, not just a family member?  Did they ask you about any of this before they did it?  Have you asked the lawyer who wrote it up, since it was done?

[sjrcpa]

EDIT: @jjtrcka22 You left out the part about the existing reverse mortgage. Mixed up the posts.

(OP posted this on another forum).