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Meaning of "Investment at risk", unreimbursed expenses

  
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Subject Author Date
Meaning of "Investment at risk", unreimbursed expenses Perplexed 04-16-2006
Posted by Perplexed on April 16, 2006, 3:07 am
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 Several years ago I lent family members a substantial sum
for the down payment on commercial rental property. They
got into a cash squeeze and converted the down payment to
equity in the LLC that operates the rental property. I have
no role in the terms and conditions of rental contracts, the
selection of tennants, -- basically they consult with me on
only one aspect of the business: land use development.

In that regard I am a retired but still licenced
professional. I meet with land use planners, building
officials, make drawings, meet with contractors and
personnaly do construction work.

I live some distance away so to go to the project requires
travel.

Because I don't make decisions about tennants Form K
indicates that I am a passive investor. As a practical
matter I am not passive because of my advisory role on the
development as a whole... but I have no say in anything.

I would like to deduct my travel expenses.. God knows I have
real money at risk if they default on the land sale
contract. How do I report my travel expenses?

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Posted by JMc on April 18, 2006, 12:15 am
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> Several years ago I lent family members a substantial sum
> for the down payment on commercial rental property. They
> got into a cash squeeze and converted the down payment to
> equity in the LLC that operates the rental property. I have
> no role in the terms and conditions of rental contracts, the
> selection of tennants, -- basically they consult with me on
> only one aspect of the business: land use development.
>
> In that regard I am a retired but still licenced
> professional. I meet with land use planners, building
> officials, make drawings, meet with contractors and
> personnaly do construction work.
>
> I live some distance away so to go to the project requires
> travel.
>
> Because I don't make decisions about tennants Form K
> indicates that I am a passive investor. As a practical
> matter I am not passive because of my advisory role on the
> development as a whole... but I have no say in anything.
>
> I would like to deduct my travel expenses.. God knows I have
> real money at risk if they default on the land sale
> contract. How do I report my travel expenses?

Most likely the activity is a passive activity.

In order to take a loss, there are three hurdles to get
over. Your first hurdle is that you might be able to take a
loss to the extent you have basis (through equity and debt -
if partnership). Your next hurdle is that you must be "at
risk" in your investment. This is pretty much the same as
having basis, except your non-recourse debt is not
considered basis in the entity. If you have enough basis
after the basis and "at risk" hurdles, and you participate
in a passive activity, you need to have passive income in
order to take the passive loss.

You can report your travel expenses on form SBE. However,
the expenses have the same character as the income/loss from
the activity (i.e. active or passive). Therefore, you need
passive income in order to take SBE expenses for a passive
activity.

One thing to note is that your passive losses carry forward
forever until you either have passive income or dispose of
the activity. In the year of disposition you may deduct all
of your suspended passive losses.

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by L K Williams on April 19, 2006, 12:18 am
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> Most likely the activity is a passive activity.
>
> In order to take a loss, there are three hurdles to get
> over. Your first hurdle is that you might be able to take a
> loss to the extent you have basis (through equity and debt -
> if partnership). Your next hurdle is that you must be "at
> risk" in your investment. This is pretty much the same as
> having basis, except your non-recourse debt is not
> considered basis in the entity. If you have enough basis
> after the basis and "at risk" hurdles, and you participate
> in a passive activity, you need to have passive income in
> order to take the passive loss.
>
> You can report your travel expenses on form SBE. However,
> the expenses have the same character as the income/loss from
> the activity (i.e. active or passive). Therefore, you need
> passive income in order to take SBE expenses for a passive
> activity.
>
> One thing to note is that your passive losses carry forward
> forever until you either have passive income or dispose of
> the activity. In the year of disposition you may deduct all
> of your suspended passive losses.

I haven't taken the time to research the definition of a
passive activity again but I'm am not so sure that such
designation applies to the OP. I don't believe that
participation necessarily means management. OP says he
conducts a number of activities for this organization.
Isn't this enough to say that he "participates?"

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by JMc on April 20, 2006, 3:45 pm
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>> Most likely the activity is a passive activity.
>>
>> In order to take a loss, there are three hurdles to get
>> over. Your first hurdle is that you might be able to take a
>> loss to the extent you have basis (through equity and debt -
>> if partnership). Your next hurdle is that you must be "at
>> risk" in your investment. This is pretty much the same as
>> having basis, except your non-recourse debt is not
>> considered basis in the entity. If you have enough basis
>> after the basis and "at risk" hurdles, and you participate
>> in a passive activity, you need to have passive income in
>> order to take the passive loss.
>>
>> You can report your travel expenses on form SBE. However,
>> the expenses have the same character as the income/loss from
>> the activity (i.e. active or passive). Therefore, you need
>> passive income in order to take SBE expenses for a passive
>> activity.
>>
>> One thing to note is that your passive losses carry forward
>> forever until you either have passive income or dispose of
>> the activity. In the year of disposition you may deduct all
>> of your suspended passive losses.

> I haven't taken the time to research the definition of a
> passive activity again but I'm am not so sure that such
> designation applies to the OP. I don't believe that
> participation necessarily means management. OP says he
> conducts a number of activities for this organization.
> Isn't this enough to say that he "participates?"

I'm just going on my experience. More likely than not a
real estate entity is a passive entity.

I believe for the real estate activity to be considered
active, you must perform more than 1/2 of your personal
services in a real estate and rental activities and spends
more than 750 hours working in the real estate activity.
Something like that (I don't have CCH up in front of me
right now).

Try doing a search on the IRS website. Something like
"active real estate" and see what you get.

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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