Final Taxes after dissolution of LLC taxed as partnership capital gains?

[Eric_R]

I am having a trouble figuring out what to do in Turbo tax to properly account for my actual gains after LLC rental house assets were sold and all funds dispersed to owners. The K-1 does not account for the cash that was returned, that might be normal, but I dont know if I need to enter a separate sale of asset to reconcile everything.

History: My Grandpa died in 2000 and left his house a couple lots from the beach to my Dad, and two Aunts at 1/3 each. In 2005, they made it into a vacation rental, and took their share of the tax consequences on schedule C each year. 

My Dad died of cancer on 3/20/2016. My Mom, with good intentions, declined to inherit it, so it passed on to my sister and I at 1/6 each plus 1/6 of the operating funds. The assigned fair market value for my 1/6 was $55000, and also my dads share of the operating fund that amounted to $2500-3000 range after loans from partners were taken out.

In 2017, everyone thought it would be a good idea to form an LLC and it was born on 9/03/2017. Now in 2020, my managing Aunt decided it was time to let it go and living far away, my sister in I had no means to operate it even if we could buy it out from my aunts. This lead to the sale of the home, dissolution of the LLC, distribution of remaining funds, and a final K-1.

My K-1 shows a minor loss from rental (box 2 -$49, covid didn't shut the summer single home vacation rental market down as much as we thought it would), Box 9c unrecaptured  1250 gains *stm $7,427, Box 10 Net section 1231gains $9,821, and box 20 other info code L see k1_179 L $8808. When I do my best to enter it all, it comes up with a sale of business assets in excess of $18,000 in turbo tax. It seems like the majority of the gains come from depreciation prior to when I even owned part of the house, in which I had no depreciation. I certainly never took any 179 deductions as the house was put in service in 2005.

I put almost $58,000 in, and only recieved $66,820, plus a total of $1600 in tax loss deductions over the last  4 years of operation. I figure at most I should have around $10,000 gain. 

The group sale report show about 45,000 in depreciation, but about $31,000 of that was before we owned our shares. It only shows 5,000 depreciation from my sister and I's 1/3, yet the totals are summed and I was given 1/6 of the gain. Also the 179 disposition statement seems say I claimed over $7,000 in passthrough depreciation, but I never did.

Do I enter a capital gains entry to reconcile everything on a personal basis? Can I edit the section 179 asset disposal worksheet to get rid of that depreciation or take the deduction now to offset it?

My main goals are to 1) Stay out of jail 2) not have major issues if audited 3) report accurate gains especially because the difference between what I think I gained and what turbo tax is saying means a difference between a family of 5 getting most of the 3rd stimulus to getting nothing, plus reducing stimulus 1 and 2 rebates since our income was a little higher in 2019.

[M-MTax]

You NEED a lawyer and a tax pro. The FIRST THING you need to figure out is if your mother formally disclaimed her share and even before that how her share was held.......was it in joint tenancy with your father or community property or in your father's name only?

[Eric_R]

I already know it was held by my dad as tenants in common with only my Dad and his two sisters inheriting it and on the title. It was never a marital asset. My mom worked with a Lawyer when declining to inherit, so her name was never on it. The pisser is that we paid over $1200 for accounting and over $1500 this year for LLC taxes to get these K-1s and they have been so far too busy to answer any questions besides giving a misleading and wrong reply to which they then said "yes, disregard that example schedule D as my assistant thought it was a corporation" Then no clarification. I am loosing sleep, sadly, and just want an idea on how it should turn out or if I am screwed by depreciation that was taken by the other partners prior, or if I am also screwed becasue I should have taken a major deduction in 2016 when I first put my portion into service, but failed. Really I want this years AGI to be lower and dont want to change the past.

This is beside the point of my taxes,  but they had it set up so every single one of her assets got a step up in cost basis, not just my Dad's half. Something to do with Alaska's community property state and/or the will/trust they had set up. She has since dissolved my Dad's trust and merged it with her assets becasue of the seemingly diminishing estate taxes, but that may have been a mistake if rules are changed and her portfolios have doubled since my Dad's passing. She quickly grew tired of having to do two sets of taxes and expense of it, so I cant blame her.

[ReneeM7122]

@Eric_R

We would suggest contacting TurboTax full service.  Estate tax is generally out of scope but they will be able to make the determination.  It sounds like you may need to amend your prior year tax returns and you should not attempt to do this on your own because your situation is complex but definitely manageable with competent assistance. Here is a TurboTax link that has more information about depreciation.

[M-MTax]

Well, the basis could have been stepped up at that point....2016.....if an election was made and the previous depreciation deductions would then go away. http://rpb.biz/wp-content/uploads/2017/01/Section-754.pdf

[Eric_R]

According to the group sale report, the cost basis was stepped up to the date of my dad's death for my portions, but not for my two Aunts. Then the group sale was  summed together and split based on our ownership percentages so their prior depreciation added to my sister and I's portion of the gain in the K-1. Also the box 20 L 179 sale was never mentioned anywhere until the final k-1, so the allowable depreciation is nothing I have ever taken, and thus it should not be in my gain. 

I am waiting as patiently as I can to talk to the accountant we already paid, but if it takes a layer after the fact, I will get to it strait. Thanks.

[Eric_R]

The previous deductions did go away for my sister and I's portion in 2016 as it was put into service for the rental, then in 2017, it was added to the LLC for the vacation rental. The group sale shows that separate depreciation for the 1/3 added in 2016 and anf 2/3 added in 2005, but the old appreciation was lumped in the group sale and added to the gain that was put on my K'1, at 1/6 of it, when very little of it was mine. Then there is the section  Box 20 code L 179 gain that also has depreciation or depreciation allowed that added to my gain in which I never have taken.

[Rick19744 · Accepted solution]

I agree with the other responses in that you need to have a one on one with a tax professional as a forum such as this is not conducive to back and forth and we can't see any documents, etc.

However, at a high level, this is what I see:

• Don't lose sleep, but I would either make an appointment with the preparer of the 1065 and K-1's or meet with another tax professional if you are not comfortable with the preparer of the 1065.  Take all your K-1's received to this appointment.
• Without being able to see any documentation and ask questions, we will need to make the assumption that the K-1 you received is correct; right or wrong, this is what is being reported to the IRS.
• Having said that, I believe the piece you are missing is that you haven't been tracking your basis in this investment.  This is critical as there are several keys here:
  • Unless you know your tax basis in the investment, you can't determine your overall gain or loss
  • You also need to know what your liquidating distribution is; maybe this is the $66,820 figure?
  • Your K-1 activity impacts your tax basis, so while you may be reporting the gains reflected on the K-1, this increases your tax basis.
  • Bottom line is you need to determine your tax basis BEFORE accounting for any liquidating distributions.  At a minimum, based on the limited facts, you started with the $55,000, you need to adjust this for the applicable lines on the K-1 and any capital contributions you made.  This needs to be adjusted for each year including the final year K-1.  So at a minimum your tax basis is the $55,000 plus the Section 1231 gain on the K-1 ($64,821).  The Section 1250 gain is not really a separate gain.  This figure will go into the computation of any capital gains tax that may be subject to 25% tax rate vs whatever your normal capital gains tax rate is.  
  • The Section 179 is the possible recharacterization of capital gain to ordinary income.  This is Section 751 hot assets.
  • I am not real clear on what the $58,000 represents.  If this represents actual capital you contributed, then this is also added to your tax basis.
  • When you look at the pieces that you haven't accounted for, in the end, it appears you have some ordinary gain (result of Section 751) and then maybe a capital loss.  Just not clear.
  • I just don't think it is as bad as you think it is, but you need to have someone walk through the tax implications.

[Eric_R]

Thanks Rick, I was hoping you would reply. I will definitely talk with the accountant, and if turbo tax cant jive with what he says, I will get local tax help. I will also confirm if I have to do an Oregon State return. I a MN resident, so I think I will have to do Oregon state return, but Oregon is only a little higher rate than MN, so besides besides the headache and cost of multiple state returns, it shouldn't be too much extra on the state side. The LLC already supplied the K-1 to the IRS and completed an Oregon state return.

[NS14]

Hello Rick,

Came across your detailed response above - it's very enlightening!. I have a slightly different query, but on similar lines. Would you mind please helping me?

Details: K1 is from a LLC partnership (real estate rental) that started in 2019 and the property was sold in 2020. Since I have indicated that the partnership closed in 2020, I see the following additional section in Turbo:

'Enter Sale Information'. 

Although I filled out the fields that were specific to the boxes 2 through 20 in a later section, the above seems to be an additional step with the the following fields:

1. Sale Price

2. Selling Expense

3. Partnership Basis

4. Ordinary Gain. 

Could you suggest what numbers from my K1 map back to the specific fields in Turbo stated above? 

(https://ttlc.intuit.com/community/taxes/discussion/re-k-1-form-1065-how-do-i-enter-the-sale-informat...)

[Thisbaer]

This is for a new job that I will be starting in 2022

[RobertB4444]

You're going to want to visit an attorney in order to start an LLC @Thisbaer.  

The state of Illinois has a guide to help you here.