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How to fix prior year returns that were incorrectly filed

SylviaP
Level 1

I have a new client that owns a rental company within a revocable trust and manages it through an LLC they created.  The prior accountant prepared the prior years' returns as if the LLC owned the property.  Now the client has sold the property through a 1031 exchange, that on it's face is valid showing the Trust as the legal owner of the property.  Since the returns have always been filed as if the LLC owned the property I am now unsure how to enter the 1031 exchange since the new property is purchased under the Trust name and not the LLC name.  My thought is to just run the new property through the LLC as well since this would be the easiest way to do things.  This entity has been doing this since 2006.  Any suggestions would be welcome.

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7 Comments 7
George4Tacks
Level 15

A revocable trust is generally just a means of holding something as an individual, but with some thought to what happens when they die. It is then generally ignored for tax purposes and the property or investment is just reported on an individual return.

The client decided to add one more complexity, but setting up an LLC to further protect this property. Was this a SMLLC and hence an ignored entity? Was the rental reported on the 1040, with an additional form possibly filed for state tax purposes. 

OR was the LLC filing as a partnership, since there was a husband and wife?

When the property was sold, what ID number was used? That of the Individual? That of the Trust? That of the LLC?

Oh! So many questions.


Here's wishing you many Happy Returns
BobKamman
Level 15

I got lost when you said "rental company."  What were they renting, lawnmowers?  These people have obviously attended one too many seminars.  

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SylviaP
Level 1

The property was in a joint Trust account (husband/wife) and is the owner of the commercial rental property (deed/property tax/ etc).  The LLC is filing as a partnership owned by the husband and wife and depreciated under the LLC return.  Maybe I am overthinking this, but the settlement statements and 1031 exchange documents all report the Trust (husband/wife) as the owner of the property, and as the owners of the new property. The LLC was created to be merely a "property manager" instead of owner of the property.  

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SylviaP
Level 1

It is a Rental Property (commercial)

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qbteachmt
Level 15

Well, I can think of one saving grace. A revocable trust can own an interest in, or even be the sole owner of, an LLC. I think you will need legal advice, though, since this goes back that far. The determination is how can/to make the LLC can be an asset of that trust (since it only includes the same people who are the grantors) and does that help. Having just done the 1031 makes it worse, of course.

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BobKamman
Level 15

The sad part is that people who think LLC's and trusts offer them some sort of "protection" find out the truth the hard way if a lawsuit comes along.  And I bet if you ask them if they have an umbrella policy, they won't know what you're talking about. 

Section 1031 exchanges sound good in theory, but in too many cases the urgency of selling or buying at close to the same time, along with double commissions and "facilitator" fees, wipes out any tax savings (especially at current low capital-gain rates).  

qbteachmt
Level 15

"who think LLC's and trusts offer them some sort of "protection" "

Well, in this case, it worked as intended. It protected them from themselves.

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"Level Up" is a gaming function, not a real life function.
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