One more thing to consider - if you're taking out construction loans, you need to be tracking loan proceeds carefully. Not all construction loan interest is immediately deductible. Interest paid on funds sitting unused might need to be capitalized into the basis of the property rather than deducted immediately.

This is a complex situation that highlights why proper business structure matters from the start. Based on what everyone has shared, it sounds like you have a few key issues to address: 1. **Partnership Formation**: Even without formal paperwork, you and your mother-in-law have created a partnership in the eyes of the IRS. You're pooling resources and sharing profits/losses on a business venture. 2. **Construction Interest Treatment**: The interest on your construction loan should likely be capitalized into the property's basis rather than immediately deducted, since you're building to sell. This means it reduces your taxable profit when you sell rather than giving you a current deduction. 3. **Required Filings**: You should be filing Form 1065 (Partnership Return) and issuing K-1s to both partners. Missing this could result in significant penalties. My recommendation: Get a written partnership agreement ASAP that documents your arrangement from the beginning, consult with a tax professional about proper treatment of the construction interest, and file the correct partnership returns. The potential penalties and audit risks of doing this incorrectly far outweigh the cost of getting proper guidance upfront. Don't try to force this into Schedule A - that's for personal itemized deductions, not business expenses from investment properties.

Something else to consider that hasn't been mentioned: if you take bonus depreciation or Section 179 on a vehicle that's used 100% for business and later convert it to personal use or sell it, you might face depreciation recapture, which can be a nasty tax hit. This applies whether the vehicle is in your name or the LLC's name. Also, check with your insurance agent about the actual cost difference between personal and commercial policies for your specific situation. Sometimes the difference isn't as big as people expect, especially if you're already carrying good coverage.

Great discussion here! As someone who went through this exact decision for my property management business, I'd add one more consideration: cash flow timing. If you buy the truck personally and use the actual expense method (rather than standard mileage rate), you can deduct the full purchase price, insurance, maintenance, etc. on your Schedule C. But if you buy through your LLC, the LLC pays these expenses and they reduce the LLC's taxable income before it flows to your personal return. The cash flow difference can matter depending on your situation. With personal ownership, you're paying for everything out of after-tax dollars initially, then getting the deduction later. With LLC ownership, the business pays directly with pre-tax dollars. Also, don't forget about state-specific considerations. Some states have different registration fees or tax treatments for business vs. personal vehicles that could tip the scales one way or another. Your state's LLC annual fees and franchise taxes might also factor into the overall cost analysis. Given that it sounds like you're already committed to 100% business use and proper documentation, either choice can work tax-wise for a single-member LLC. I'd focus on the insurance cost difference and cash flow implications for your specific situation.

One angle nobody's mentioned - what about treating this as an installment sale of stock to the corporation? Could argue the shareholder effectively sold back a portion of their stock representing the sold location, with payments over time. Section 302(b)(2) might apply if it's "substantially disproportionate.

I've been following this discussion and wanted to add a practical perspective from someone who's handled several similar cases. The partial liquidation route under 302(b)(4) is definitely your strongest argument, but you'll need to be very strategic about the documentation. Here's what I'd recommend focusing on: First, gather any evidence showing the business decision to contract operations was made for legitimate business reasons, not just to distribute cash to the shareholder. Look for emails, text messages, or any communications from 2021-2022 discussing market conditions, profitability of each location, or strategic planning around downsizing. Second, consider having the corporation formally adopt a resolution now acknowledging that the 2022 sale was part of a business contraction plan, even though it wasn't documented at the time. While retroactive documentation isn't ideal, courts have sometimes accepted it when supported by contemporaneous evidence of intent. Third, make sure you can demonstrate that this represented a "genuine contraction" of the business under the regulations. Going from 2 locations to 1 is a 50% reduction in physical operations, which should meet the threshold. The monthly payment structure actually helps your case - it shows this wasn't just a cash grab but a structured business transaction. Document that the buyer is paying market rates and terms typical for franchise sales in your area. One warning though: if the IRS challenges this, they'll look closely at whether the shareholder had any plans to expand again or acquire new locations. Make sure your client can demonstrate this was a permanent contraction, not temporary.

Has anyone dealt with a situation where the ex-spouse refuses to share information about improvements they made to the property? My ex won't tell me what she did to the house after I moved out, but I know she finished the basement.

One thing to keep in mind is that since you haven't lived in the house for over 5 years, you'll be subject to capital gains tax on your portion of the profit. However, make sure you're calculating your basis correctly - it should include not just half of the original purchase price ($121,000), but also any qualifying improvements made while you owned the property. The fact that your ex was responsible for ongoing costs per the divorce decree doesn't change your tax basis, but any capital improvements made during your joint ownership period could increase your basis and reduce your taxable gain. Given the numbers you provided, you're looking at roughly a $31,000 capital gain ($152,000 - $121,000), which will be taxed as a long-term capital gain since you owned the property for more than a year. When entering this in TurboTax, make sure to indicate that you received a 1099-S and report your 50% ownership share. The software should walk you through the process, but double-check that you're only reporting your portion of both the proceeds and the basis.

Theres another aspect nobody mentioned - if your LLC is treated as an S-Corp for tax purposes (which many are), then completely different rules apply for redemptions! In that case, you're looking at stock redemption rules under sections 302 and 301 instead of partnership rules.

This is a really complex area that trips up a lot of people! One thing I want to emphasize that hasn't been fully covered - the timing of when you make a Section 754 election is crucial for redemptions. If your LLC doesn't have a 754 election in place at the time of the redemption, you generally can't get the step-up in inside basis that would benefit the remaining partners. The election has to be made by the due date of the return for the year the redemption occurs (including extensions). Without the 754 election, you end up in a situation where the redeemed partner's share of inside basis essentially disappears along with their outside basis, which can create some weird economic distortions for the continuing partners. They might be stuck with lower depreciation deductions than they should have based on what they effectively "paid" for the redeemed partner's share of assets. Also, make sure you're considering whether any of the redemption payments might be characterized as payments for unrealized receivables or goodwill under 736(a) - those get treated as guaranteed payments or distributive shares rather than distributions, which completely changes the tax treatment for the departing partner.