how to handle a mid year conversion from LLC partnership to single member LLC?

Forum|Forum|4 years ago
March 8, 2022
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Last year an LLC which holds a residential rental converted from a multiple partner LLC to a single member LLC (just me). I have filed a final 1065 for the LLC for the time it was a partnership and I was going to put the rest of the p&l on my schedule E. That is fine for rent and expenses. But in personal turbo tax I am unable to find how to allocate only a partial amount of the depreciation, not the full year. Depreciation of my acquired interest starts from when the transaction happened, but my original interest depreciation should have no change, just an allocation between the 1065 time and schedule E time. I can't see a way to override the software to take less than the full year. Any ideas?

TurboTax Home & Biz Windows

Best answer by Rick19744

(This is the preferred method of the IRS.)

Where does it say that's the preferred method?

This transaction is to be handled in accordance with Revenue Ruling 99-6; situation 1.

rr-99-6.pdf (irs.gov)
This event is treated as a termination of the partnership
The partners are deemed to have received a liquidating distribution of their share of the assets.
You (partner B in this Rev Rul) will take what is called a "substituted basis" in your share of the assets distributed out. This requires you to allocate the assets received in liquidation in proportion to your outside tax basis. There are specific steps that need to be followed in determining the substituted basis of assets distributed in liquidation.
Your substituted basis in the assets received will "tack" the holding period and depreciation method of the LLC to the extent the substituted basis does not exceed the basis when held by the LLC.
If your substituted basis in the assets received exceeds the basis when held by the LLC, the excess portion is deemed a new asset; new holding period and new depreciation
Your basis of the purchase of your partner's interest (partner A in the Rev Rul) is the purchase price which is then allocated to the assets purchased.
The purchased assets will receive a new holding period and depreciation method and period for applicable assets.
Yes this gets complicated as you now have a bifurcated basis in the assets

Carl11_2

Employee

It doesn't work the way you may think. First, it all depends on how you acquired the 50% that was owned by the ex-partner. Did you buy them out of their share? Maybe they passed away and you inherited it? Or they could have gifted it to you?

Precisely how you legally acquired the ex-partner's share will determine how you will enter this for the SCH E on your personal tax return.

scphil21Author

I bought their interest, which was 33%.

Carl11_2

Employee

I fully expect that your own K-1 (not just your ex partner's) is marked as final. Since you paid for that 33% and now own 100% of the property, you'll be entering the property as an entirely new rental property with a new cost basis, and depreciation starts all over from day one, for the next 27.5 years.

Your cost basis on the new property is:

What you paid for your share originally when you purchased it, plus what you paid for the 33% you purchased from the partner. From that total you will subtract the depreciation that *YOU* have already taken on the property while it was in the partnership. This total will be your new cost basis. Add to that any property improvements that "you" paid for. You can not include in the property improvements any that the ex-partner contributed to those improvements.

Enter the property as a new rental property with an in service date no earlier than your closing date on the purchase from the partner. You'll indicate that you purchased this property new.

The depreciation "you" got while it was in the partnership is already reflected/reported on the K-1. The depreciation your ex partner took is theirs to recapture on their own tax return - as you already know, of course.

Now, you will have to document somewhere the depreciation "you" took on the property while it was in the partnership, as you will need to include that amount in your depreciation recapture should you sell the property in the future.