How to dispose of rental property that was distributed in kind to partners

[awaynenichols]

Hi all!

My parents and I have been managing a rental property held under a partnership LLC.  We are liquidating the partnership this year and have distributed the rental property back to the partners in kind.

I'm doing the final 1065 return, and TurboTax is forcing me to specify how this asset was disposed of.  I have options for "sold, exchanged for another property, stolen, casualty loss, given away, disposed of some other means". 

I don't see the option for "distributed in-kind", and I'm wondering if I messed something up?  I did make sure to add the FMV of the property distributions to the partner information sheets for this  year.

Any help would be appreciated.

[M-MTax]

Don't think you do it in that part of the software. You're making a distribution of property so that's on the K-1. Probably just have to use disposed of by some other means or something that won't force you to put in a dollar figure....because you didn't sell it. 

[AmeliesUncle]

Partnerships can be complicated, and the final year of a Partnership can be really complicated.   You really should go to a good tax professional that is experienced with Partnership this year.

[Rick19744]

Since TT Business is a Windows only product, I don't have access to that program.

However, what happens when you choose "disposed of some other means"?

You want to make sure you calculate the depreciation correctly.

I agree with @M-MTax that the liquidating disposition is reported on the Sch K and K-1's.

The property needs to be distributed in proportion to the member's LLC interest or this will cause issues.

Additionally, the property in the hands of the members will take a "substituted" basis.  This means the members need to know their tax basis in the LLC.  This is important, as this is what allows for the liquidating distribution to be nontaxable.

Another factor in this liquidating distribution is what else was distributed out.  This will impact the "substituted basis" computation.

Lastly, depending on the "substituted basis", this will determine how the property continues to be depreciated.

This could be tricky, as there are specific rules that address this, so you may want to consult with a tax professional.

[awaynenichols]

Thanks Martin, I'll do that.  It seems like in kind distributions would be common enough that turbotax would have a prompt for it.

[awaynenichols]

Yes I agree.  The LLC was formed for one rental property only, and we have been in an awkward position of the annual rent not being enough to really justify what a CPA charges, but the taxes also being really hard for me to do.  Lesson learned.

[awaynenichols]

Hi Rick,

Thanks for the help.  I think I understand the basis calculation that gets reported on the K-1s, effectively becoming the remaining partner capital accounts minus the final cash distribution at liquidation.

Just wanted to make sure I was informing turbotax of the dissolution via in kind distribution in the right way, since you would think this situation would be common enough that the software would accommodate it a little better.  Partnership returns are rough!