Rental property partnership buy out

For several years, I owned a 50% interest in a rental property. Last April I purchased my partner's interest and now fully own the property. I'm not sure how to report the depreciation for 2006 and beyond. I could carry on with the old depreciation for the 50% interest as I always did. Then, I could calculate the new 50% interest I just bought seperately. Is this correct?
Thanks,
MD
Reply to
MDinDestin
You need to talk to a tax attorney. There are two ways to close out the partnership books. You may end up using the proration method. You will also need to consider the tax rules in light of your partnership agreement (or articles of organization if a LLC). You might also be able to go back and structure it as an installment sale (Section 453) or redemption (Section 736) -- which might be more advantageous to you. Kreig Mitchell
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Reply to
Kreig Mitchell
Co-owners of rental property as described by the OP are not partners for tax purposes, they can each report their own share of the rental on individual Schedule E. Since the seller of one-half of the rental property undoubtedly reported their capital gain and unrecaptured section 1250 gain, I suggest the new 50% of the property be separately depreciated as if it were a separate property, just as the OP proposed. -Mark Bole
Reply to
Mark Bole
Whether or not a partnership existed for federal tax purposes, the result is likely to be the same, namely, the OP will be treated as having purchased his associate's 50% interest in April of 2006. As a result, the OP should treat the 50% interest he acquired from his associate as a new item of real property placed in service in April 2006, and amortize his cost for that 50% accordingly. With respect to the 50% interest that the OP has always owned, he would continue depreciating that on the old method used prior to April 2006. The reason for this are as follows:
If there was no partnership, then there was a "mere co-ownership" under Treas. Reg. 301.7701-1(a)(2), and the OP and his associate would have taken their own items of expense and deduction into account separately, and could have elected different depreciation methods. Upon sale of the 50% interest by the associate to the OP, the OP would have in fact acquired a new asset, the 50% interest purchased, which would have been first placed in service by the OP in April 2006, depreciation would be calculated based on the purchase price as of April 2006, as would any amortization. On the other hand, if a partnership existed, the termination of the associate's interest would have terminated that partnership. As a result, under McCaulsen v. CIR, 45 TC 588 (1966) the partnership would be deemed to have distributed the real property to the two partners in liquidation, and the OP would then be deemed to have purchased the 50% undivided interest distributed to his associate. This result would be deemed to have occurred regardless of whether the OP purchased the LLC/partnership interests of his associate, or else purchased the 50% interest from the partnership, which then liquidated and distributed the cash to the associate and the remaining 50% interest to the OP. As to the other 50% interest, since the OP would have received that from the partnership as a liquidating distribution, the OP would generally continue to depreciate that interest on the same schedule as formerly; however, if the OP's outside basis were less than the inside basis of the real property, then the depreciation deduction amount would be reduced to take into account the fact that the OP would have received the interest with a transferred basis that was lower than the basis being depreciated by the partnership. having acquired his associate's 50% interest by purchase in April 2006, and would start a new holding period and a new depreciation and amortization schedule in April 2006 for the 50% interest the OP acquired from his associate. Thus, unless the OP and his associate engaged in some funky financing arrangements, the OP's original 50% interest would continue to be depreciated on the old schedule, and the 50% interest he acquired from his associate would be depreciated as a newly acquired asset first placed in service by the OP in April 2006, using the purchase price as the basis to be depreciated.
Reply to
Shyster1040
I appreciate everyone's comments. Your post reminds me of when I was a very young, very green investor. I went to a very expensive CPA and he had me doing partnership forms and other things that were totally unnecessary. I wasted a lot of money with this clown before I got wise. That and a bad appraisal one time made me realize if I want it done right, I'll either do it myself or educate myself enough to tell crap from shinola.
Reply to
MDinDestin

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