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I recently turned my investment property into an LLC for liabiliy purposes. Now I want to sell it and my question is if I can deduct all my expenses from the sale like improving the vacant Lot into an apt with all the services plus other improvements to the property or do I have to dissolve the LLC first?

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    Tax laws vary, where are you? In different countries LLCs are handled very differently
    – littleadv
    Commented May 3 at 1:00
  • I am in San Antonio Texas Commented May 3 at 3:24

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In the US, LLCs are disregarded for tax purposes unless you explicitly chose to treat them as a corporation. If you did - then corporate rules apply, here I'll assume you didn't.

You cannot deduct improving the vacant lot from your investment income, because it's not an expense. Improvements are capitalized, i.e.: become depreciable assets, and the depreciation is the deductible expense.

However, when you sell the property, the amounts not depreciated become your cost basis, and the proceeds of your sale in excess of the cost basis are your capital gain. The income tax is on the net income, i.e.: the capital gain.

For more details see the IRS Publication 551 and the IRS Publication 946.

Not every cost you incurred is added to your basis though, only improvements. Maintenance costs (fixing something that already exists), ongoing expenses (insurance, utility bills, property taxes, mortgage interest, HOA dues), etc. - these are not capital improvements, and are not added to basis. Instead, these are the investment expenses and can be deducted against the investment income (e.g.: rent you collect from the property). If your property is not producing income, then these become personal expenses. If you're in the business of developing properties (i.e.: you're a flipper, professional builder, etc), these are your business expenses. You'll need to discuss this with a tax professional to figure out how these should be handled in your specific situation.

As to dissolving the LLC, since it is disregarded for tax purposes it doesn't matter whether you dissolve it or not. You'll need to discuss with your attorney about the liability exposure and whether you still need it after the transaction closes.

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In the US, for federal income tax purposes, single-member LLCs are treated as disregarded entities by default, unless the taxpayer elected otherwise. A disregarded entity's activities are fully reflected in the owner's tax return as if the owner performed these activities. In this case, dissolving an LLC or not generally has no effect in tax treatment.

From the face of your question, it sounds like you may not have a clear understanding in the tax concepts you are using, such as deduction, improvements, etc. It would be best to consult a CPA or tax attorney, and avoid using tax jargon to explain your situation when possible.

Reference: https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies

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