The mechanics of 754 for an LLC after member has died

A little background.

We have an LLC that has a multifamily property in it. My sister had a 13.23% interest and I have an 86.77% interest. My sister passed away on March 31, 2022 and I inherited her 13.23% interest.

The property was purchased in 2011 and had an original cost of $2,602, 851 of which $1,200,000 was land and $1,402,851 was the building. I am now 100% member of the LLC and owner of the property. I also understand that the LLC will become a disregarded entity. When my sister passed away, we had just done a re-finance. The appraisal at that time came in at $5,525,000.

I understand that I can have a 754 election by attaching that to the 1065 return. I understand that there is the inside step-up and the outside step up of basis.

The first question is how and where on the 1065 and the K-1's do I add the step-up. Which forms? Which Lines? I am using intuit Business.

The second question is based on the new appraised value how I calculate the step-up.

The 3rd question is do I need to file two 1065's? one for the two member LLC and the second beginning after my sister passed away as a disregarded Entity.

It's very confusing. Thank you for any help.

2018

Level 15

Feb 18, 2023 11:05:10 AM

i am going to page @Rick19744 but given the asset value stated here, you should definitely seek guidance from a tax professional.

The following link may be of some utility which, in short, provides information on how to make the election.

https://www.irs.gov/businesses/partnerships/faqs-for-internal-revenue-code-irc-sec-754-election-and-revocation

One thing that is clear is you will have to file a final 1065 and then you will wind up with a single-member LLC which is a disregarded entity for federal income tax purposes.

Level 13

Feb 18, 2023 11:58:19 AM

Sorry for your loss.

I am going second @Anonymous_ suggestion to get a tax professional involved.

While you provided some good details, there are a number of issues that are best addressed with a one-on-one discussion:

As you noted, the death of one of the members in a two-member LLC will terminate the partnership.
Going from a multi-member LLC to a single-member LLC (disregarded entity) is discussed in Revenue Ruling 99-6.
Technically, under the provisions of IRC Section 1014, your inheritance of your sister's interest is stepped up to FMV (or alternate date value).
I would still include a Section 754 election and Section 743 details in the final form 1065.
- For me, this is just a protective election to avoid any potential issues should you win the audit lottery
- This also provides the details of the step-up which is key upon liquidation and the basis of the assets distributed in accordance with Rev Rul 99-6.
When the LLC liquidates, you will have a bifurcated basis in the assets; a basis for your original interest and then a basis for the inherited interest.
- There are special rules in determining the basis (called substituted basis) when assets are distributed in liquidation.
- This could impact the basis related to your original 86.77%
- Shouldn't impact the inherited basis portion since the 754 election stepped up the 13.23% interest so the inside and outside should be equal.
You will only file one form 1065 and it will be marked final; along with final K-1's
As a single member LLC, you will report this activity on Schedule E on your form 1040
I would recommend you get an appraisal of the property; split between the land and the real estate as the taxpayer has the burden of proof to support the step-up.

You are correct in that partnership tax is confusing and it will be in your best interest to have a tax professional help you file your final form 1065 and provide you with guidance on the basis of the assets going forward as a single member LLC.

Your final partnership return is most likely late, so that is another reason to bring in a tax professional.

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The mechanics of 754 for an LLC after member has died