The mechanics of entering the step up in an LLC 754 election

[camchor]

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. 

[DianeW777]

Let's try to make it more clear even though it can be confusing. First, is the election and the stepped up basis for your inherited portion of the building and land.

To make the election, a partnership must attach a statement to the partnership’s timely filed return (including any extensions) for the tax year during which a distribution or transfer occurs.  Statement information:

• The statement must include (1) the name and address of the partnership, and (2) a declaration that the partnership elects under IRC Section 754 to apply the provisions of IRC Sections 734(b) and 743(b). See Final Treasury Regulation 1.754-1(b)(1). 
• The election applies to all distributions and transfers during the tax year with respect to which the election is initially filed, and to all such transactions in any subsequent years. It cannot be revoked without permission from the Commissioner. 

1-Basis Adjustment:

You inherited 13.23% of the multifamily property. Your portion of the basis for both land and buildings will remain the same because you owned it and you still own it. So 86.77% of those costs will remain exactly the same.  You would take your percentage to arrive at your cost basis for your portion (belonging to you) before death/inheritance of the remainder.  

This will be entered as an asset with the original date placed in service and all prior depreciation on this stands as it was.  TurboTax will calculate prior and current depreciation on the building. 

The portion that was your sister's now has a stepped up basis.  To determine that amount you will use the fair market value (FMV) of the land and building on the date of death. Use your sister's percentage of ownership to add the remainder interest you now have in her portion of the property.  Create another asset for building and land for the FMV you calculate.

• FMV x 13.23% = Cost Basis of the second asset.  Depreciation begins on the date of death for this new asset (building and land).

Once these steps are completed, then you should remove the original asset(s).

2-Returns to File: You will file the partnership return as a short year.  You report income and expense up to the date of death without changing the assets. It should be marked as the final return. You do NOT file two partnership returns.  Since the partnership will now be a disregarded entity, you will file your return including all activiity for the remainder of the year (the day after death - December 31st).

[camchor]

Wow what a great explanation. Thank you! This makes perfect sense to me now. A couple more questions.

1. When I create another asset for my sisters portion of the land and building FMV x 13.23% what do I title it? 

New 8 units? Step up 8 units? I assume it cannot be the same as the original titled building? does it matter? 

2. I assume that since it is still rental real estate that I depreciate this new asset over 27.5 years correct?

3. My Sister passed on March 31st. Do I start the disregarded entity for my return on April 1 or March 31st

4. In California, we are required to file California form 568 for LLC's and pay the $800 annual tax. Disregarded Entities are also required to file California form 568 and pay the $800 annual tax. since I will be filing both a final 568 for the LLC and a 568  for the disregarded entity, I assume I am only required to pay the annual tax once.  

Once again thank you for all of your help. 

[DianeW777]

The answers to your questions follow in the order you printed them.

1. Yes it matters so that you know the difference and can track each portion.  You can use something simple like 'Inherited Portion".
2. Yes, you will depreciate the new asset over 27.5 years because it is still rental property and the rules haven't changed.
3. Technically it begins on the day after death.  The partnership will end on the date of death.
4. I suggest you contact the California (CA) Franchise Board to see if you can get clear instruction about the annual tax since two returns must be filed.  Taxpayers with general questions can call (800) 852-5711 or visit our website at ftb.ca.gov.