Investors & landlords

For sake of further clarification-

The disposition of rental property is deemed a sale unless it is converted to personal use.  In this instance you are not converting the property to personal use, you are contributing it to a multi member LLC.

For purposes of answering this question I assumed that you had already handled the transfer of the deed to the LLC as well as any necessary documents to a mortgage lender (if there is one) and that you are not trying to operate a joint venture with your spouse in a community property state (in that case the LLC would be a disregarded entity and the taxes would not change at all.  Here is the IRS on disregarded entities).

So in this case your two-member LLC is a partnership with someone else (or with your spouse in a non-community property state) and you are contributing rental real estate to the LLC.  If that's the case then this is indeed a sale.  The properties have been sold in exchange for an interest in the LLC equal to their value.

But it is a sale with no gain or loss.  The property is contributed to the LLC in exchange for a basis value equivalent with the fair market value of the property contributed,  The basis of the rental property transfers to the LLC for depreciation purposes,  so the LLC will depreciate the same basis as you were depreciating on your schedule E.  

The transfer is covered by IRS Section 721 (that entire section is here) which covers non-recognition of gain or loss from a contribution to an LLC.  So, while this is a sale, no gain or loss is recognized in the transfer.  That is why the sale price of the rental real estate is the same as its basis and the contributed basis is the same as the sales price.  The value of the contribution for purpose of the owner's stake in the LLC is the same as the fair market value of the contributed property.  

In TurboTax, this is entered as a sale with the sale date of the date of the contribution to the LLC.  The sale price is the basis of the property on that date (so that no gain or loss is shown).  Any expenses prior to the date of transfer are entered into the personal return as part of the expenses of the rental real estate as shown on the schedule E every year.

In the LLC return, the property is shown as a contribution from you.  Your basis in the LLC will be equal to the value of all contributed property at it's fair market value.  If you put in five houses that are worth 100,000 each then your basis is 500,000.  The basis that the LLC will depreciate and show on its balance sheet as assets is the depreciated value as of the date of contribution - the same value that you had as a sales price earlier.

You can't convert the properties to personal use because you will not be using them personally.  The LLC will be using them.  

As one last footnote of caution - make sure that all of the documentation transferring ownership of the properties to the LLC has been completed.  There is no protection from the LLC if you retain personal ownership of the properties.  

@hobbycheesemaker 

[Edited 01/22/2024]