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Depreciable property contributed to LLC

I am trying to determine how to put contributed depreciable property into an LLC

Assume the following:

two equal owners- related but not married

residential rental property- 27.5 years life

original basis- 100,000

depreciation taken- 10,000

current FMV- 125,000

above owned as joint owners

property contributed to a new LLC formed to hold this property (just the same two owners)- within the LLC it may continue to be rental property or simply held as investment property until the property is sold

Questions:

  1. contributed property would have inside basis to LLC on books as
125,000- correct?

  1. outside basis to partners- 45,000 each ((100,000-10,000)/2)- correct?

  2. how do I put this on LLC tax return? asset with 125,000 basis (with no accum depreciation), 90,000 basis (with no accum depreciation), or 100,000 basis (with 10,000 accum depreciation)?

  1. how to calculate depreciation? continue the same depreciation schedule over the remaining life or start again at what basis and what life?

  2. if property is sold by LLC, it would be a capital gain- but is asset basis 100,000 and 10,000 depreciation recapture or something else?

At this point I am thinking of doing LLC books on tax basis, 100,000 asset (with 10,000 accum depreciation), and continuing original depreciation schedule. A sale would then be sale of capital asset with 100,000 basis and

10,000 depreciation recapture (plus recapture of any depreciation taken within the LLC).

I have researched but cannot find definitive answers. Any help would be appreciated or point me to some research material.

Reply to
CMS_VA_CPA
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That's what I read in a book, so it sounds correct.

Not sure, but maybe the individual should file a form 4797 to indicate disposal of the property (as it was disposed by them and transferred to the LLC). If the 10k was straight line depreciation it might not need to be recaptured -- regarding the rules for the 1245/1250 property, but I'm not sure. The cost basis would be 100k, depreciation 10k, selling price 90k, so no tax should be due. Thereafter the LLC depreciates the property for 27.5 years using 125k as the cost basis.

Sorry, my answers are not definitive either. This is all new to me. I don't know the answer to #5.

Reply to
removeps-groups

The tax basis of the property to the LLC would be $90,000.

Yes.

$100,000 acquisition cost less $10,000 accumulated depreciation. The $90,000 would be recovered (deducted) over the remainder of the 27.5 year useful life.

Same schedule using remaining life.

No, it would be the sale of a 1231 asset which is not quite the same thing. The sale is reported on Form 4797.

Right about the tax basis and depreciation. Not so much about the sale. Property used in a trade or business is not a capital asset (despite what economists say).

Hmmmm... that's a troubling remark.

Good luck.

Regards, Bill

Reply to
Bill Brown

I don't think so because I think Section 721(a) applies: there is no gain, the basis within the partnership (which happens to be an LLC) is 100,000, and the partners now each have a basis in the partnership of

50,000 each.

That is, they have the same basis as before, only now it's in the partnership instead of in the property itself.

Interested in other opinions though.

Steve

Reply to
Steve Pope

Because LLC taxation is a pretty complex subject, I'd strongly advise you have a CPA or EA prepare the tax returns for you. That person can suggest the best basis to use; normally tax basis is used when you aren't preparing GAAP-basis financial statements. Another thing to watch out for with an LLC (but not for a general partnership) is at- risk limitations if the property is encumbered by debt. Even if the LLC has a loss, you might not be able to deduct the full loss until there is income (such as from the sale) against which to take the loss.

Reply to
Tom Healy CPA

This one is very straight-forward. There's an internal renevue code section that makes the contribution of property to a partnership [which includes an LLC that's being taxed as a partnership] basically a "nothing really happened, and everything carries over" transaction. It's not a taxable event, and there's [usually] no income to be recognized. The adjusted tax basis and depreciation of the property are just the same as they were in the hands of the two individuals. Even the holding period carries over to the LLC.

I would be more concerned with how the *legal* aspects of the transfer of the ownership of the property are being handled. Is the title to the property being changed from the two individuals to the LLC, and is this change being recorded in the local land records? Is there a mortgage on the property and if so has the mortgagee been notified of the change of ownership? Existing leases should be changed to the new owner's name and the tenant(s) should be notified. Will the LLC now become the insured owner on all the insurance policies? Are the utilities being changed to the LLC's name?

Is there a security deposit and how has it been accounted for?

What have I forgotten?

"...two equal owners - related but not married." Is this property in West Virginia?

Reply to
LoTax

Hi Lotax , do you know the ruling where you read the above statment you mentioned to read more about that ?

Reply to
sandra.t.rodriguez

You should start at IRC Section 721

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Reply to
lotax

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