To clarify,
what type of entity is the new business- partnership, S-Corp or something else?
(NOTE an LLC must also be something else for tax classification, such as a Sole-Proprietorship or Partnership)
If you are moving the rental from one type of tax reporting to another, and the rental was being reported on your personal 1040 Schedule E, first enter all expenses and income for 2023, then indicate that the rental was converted to personal use on your personal 1040.
This will stop deprecation and close out your schedule E.
You will have Accumulated Depreciation on the building and any other assets that were entered. You may also have Section 179 deductions and possibly Bonus Depreciation.
All this depreciation and deductions need to be recaptured. If the rental was sold, the depreciation recapture is calculated on the sales proceeds. Since this is not the case in your situation, you lower your adjusted basis to account for the recapture and enter as a new rental for the business at this lower basis.
Example, you purchased the building for 250,000 and land 20,000. 270,000 total
You claimed (or could have claimed) 50,000 depreciation.
Enter the rental as new with a basis of 20,000 land and 200,000 building. 220,000 total
When the property is eventually sold, you will need to adjust the gain (if any) and depreciation recapture at that point.
Example, the property with land is sold, after claiming an additional 10,000 depreciation, for 300,000.
That means you have a profit of 30,000 from what you originally paid. (300000-270,000)
Say you allocate 23,000 to land for a 3,000 profit which is capital gain because land does not depreciate, so there is no depreciation recapture on the land.
You allocate the remaining 277,000 to the building. You originally paid 250,000 so that makes a 27,000 profit, however you took 60,000 depreciation total on the building, so all 27,000 is depreciation recapture.
If you sell for 470,000 ( 200,000 profit) you could have 3,000 capital gain on the land, 60,000 Depreciation Recapture and 137,000 Capital Gain on the building.
Depreciation Recapture is taxed as Ordinary Income
Depreciation Recapture
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