Convert Residential Rental from 1065 to Personal Schedule E

Forum|Forum|3 years ago
April 12, 2023
2 replies
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I have a 1065 return with multiple investment properties in it. Partners are husband, wife and another LLC that is also wholly owned by husband and wife (no other partners).

One of the properties was placed into the LLC erroneously with depreciation for a couple of years. The problem is that they did not transfer title to the LLC and it will force the owners to file as a foreign entity in CA (other fees) when it's not necessary. This particular property has enough coverage under liability umbrella that attorney is not worried about it being in LLC and is not a commercial property.

My question is will this trigger capital gains if I transfer this out of the LLC and start reporting on owners Schedule E on personal return. Do I have to transfer the basis at FMV if I dispose of it on the 1065 and add to Schedule E or can I dispose of property on 1065 and enter on Schedule E at same cost basis with remaining depreciation life?

DianeW777

Yes, you can transfer out of the LLC and report on the Schedule E as though it was always on the Schedule E of the individual(s). This would be treated like property transferred between related parties which retains the same character. Basically, there will be no sale just a change in the official name of the owner vs the LLC.

What Is a Related-Party Transaction? The term related-party transaction refers to a deal or arrangement made between two parties who are joined by a preexisting business relationship or common interest. Companies often seek business deals with parties with whom they are familiar or have a common interest.
- Related Party Rules - IRS Publication 544

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gigim1Author

Thank you so much for that!!!

Rick19744

Employee

If the property was erroneously placed in the LLC and does not belong in the LLC (based on your facts), you need to amend the prior year tax returns; both the LLC and your personal tax returns.

You can't transfer out property that shouldn't have been in the LLC to begin with.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

gigim1Author

@Rick19744 This would ultimately have the same "net" effect on the tax returns due to the pass-through of income from the partnership to the same individuals. I understand that the LLC didn't own it but that becomes more a legal issue than a tax issue if it results in the same taxation...no?

Rick19744

Employee

A few additional comments:

While we don't have all the facts, and the net impact may not change, if audited, the IRS has the ability to tell you that incorrect returns were filed and mandate that they be corrected via amended tax returns. As a result, there could be penalties assessed. Not saying penalties will be assessed, this always depends on the reasonableness of the agent on the case.
I have no idea what your tax basis is, which is extremely important in this instance.
- Under the improper handling of this transaction, was the initial LLC tax return reflected as if the LLC purchased the property?
This is not only a legal issue, but a tax issue as well as noted above.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.