Before we can provide some assistance, clarification is needed.
- Hopefully member #2 paid the estate of member #1 the $$ when acquiring the interest. Please confirm.
- When did member #2 acquire member #1 interest?
- At date of death (DOD)
- Or did member #1 interest go into an estate for a period of time?
- Only member #1 proportional assets get the step-up. This will be handled with a Section 754 election made at the entity level. Both the entity and member #2 will need to provide documentation with the respective tax return for the information related to Section 743.
- These type of transactions get complicated.
- Member #2 will just step into the shoes of member #1 internal capital.
- The Section 743 adjustment will be allocated to the assets to step up to FMV at DOD. Any depreciation associated with this step up is specially allocated to member #2 on their K-1.
- The value of the assets doesn't change internally. The only "addition" is the Section 743 adjustment noted previously.
- No gain is recognized on this step up. This should be handled by the appropriate tax return for member #1; most likely the estate return.
- You shouldn't need to override any ownership percentages. These should be changed in the member information section; and will be adjusted based on the response to bullet #1.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
