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.
*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.
