Entering Loans From LLC Members

Hi Tony,

The first thing that is important here is to determine if the expenditures are period expenses or capital asset additions. If the LLC owns the property that is being rehabbed and you guys are doing some pretty major improvements to the property, you should be capitalizing these expenditures to a "Building Improvements" asset account. These improvements will be depreciated in the same manner as the underlying property. If it is a residential investment, the improvements should be depreciated over 27.5 years. If it is a commercial property, the improvements should be depreciated over 39 years. If the building is not suitable for moving in and you guys are just acquiring it and getting it ready, you should not depreciate either the building or the improvements until the property is ready to be placed in service. If this is a property that you guys will fix up and then sale, you should still capitalize the amounts.

If you are only making minor repairs to a property that is already placed in service (such as a rental property), you can probably expense the amounts to "Repairs and Maintenance".

You can show the funds provided by the LLC member as equity or a loan. That is up to the members/partners. If the members/partners are trying to maintain a consistent equity split, the loan would be your choice.

PTech: Thank you very much for your response. We purchased the residential property, took about 2 months to fix it up, and are now under contract to sell it. We are not buying and holding but flipping. We are spending anywhere between $35k-$100k for the rehab costs (for properties whose resulting market value is anywhere between $200k-$400k).

Would you mind detailing exactly how I would set up the depreciation and/or capitalization? I could probably search and find the answer (painfully) but if it's possible to get the steps from you I would greatly appreciate it.

Thanks again, Tony

Rehab expenses should be itemized as an expense account and not as goods sold.  For example, Painting should be listed as "Painting" under Repairs and Maintenance in your Chart of Accounts.  Every repair should be listed in your Chart of Accounts and assigned a Property that generated the expense either on the check itself or on the Bill.

Other Current Liabilities is money you received but need to pay it back so that is okay.

Member A's Credit Card. 

This is how I would do it.  I would write a Check to Home Depot.  I would list all the charges at the bottom part of the check in QuickBooks and assigned each charge to a rental property (If it is just building supplies and only one property I would say under the account column, Building Supplies and list the Property under the Class Column).  If you had two properties I would list Building Supplies under the account column and assign the class, and on the next line say Building Supplies and assign the other rental property, etc.

This pays off the Charge Card for Member A and also assigns what you did (you purchased supplies to repair the building) and it tells you what building you repaired by listing it in the class column.

Nancy Neville, Certified QuickBooks Pro Advisor

Landlord Consultant, Owner of the Landlord School

Author of "The complete Book QuickBooks for Landlords, Property Managers and Investors)

http://www.nancyneville.homestead.com

To Nancy178: Thank you for your feedback. When I originally set up my Chart of Accounts I actually sat down with our accountant and he told me to set up "Cost of Goods Sold" accounts for all expenses tied to our properties, and to differentiate between properties by assigning a different Customer:Job for each. I can't remember exactly why he didn't go with using "Class" to differentiate between the properties, or why he chose "Cost of Goods Sold" as opposed to another type of expense. I thought that maybe it was because we are not dealing with rental properties but flips (we only hold each property for 3-6 months time). Do you see anything "wrong" with using "Cost of Goods Sold" in this scenario?

Thanks again

Tony

PTECH summed it up quite nicely.

Nancy Neville

Ok, thanks Nancy