Existing 1031 property transfer to LLC - how to avoid rolled-over capital gain taxes

[aysoref]

Had a rental property in CA. Sold it, did a proper / by the book 1031 exchange to a rental property in OK. Important aspect = the capital gain from the sale rolled over to the new OK rental.

For 2 years, we reported the OK rental on our own 1040, schedule E.   This year, formed an OK LLC and transferred the rental property title to it. Did it all properly, by the book, lender approved, insurance approved, etc. The LLC has an EIN; it is neither an S corp, nor a C corp; husband & wife = only members.

How do we report the new OK rental going forward?

1 - Do we remove it from our own 1040 schedule E and add it to the LLC's 1065 ? If so how do we "remove it" WITH NO TAX IMPLICATIONS?

2 - Do we list the title transfer as a "sale" in 1040 schedule E ? If so, will this trigger a tax on the original rolled-over capital gain? I want to avoid this scenario. NOTE: California wants to tax the rolled over capital gain when you *sell* the new property...

3 - Or how else do we transfer *the rolled over capital gain* along with the title to the LLC?

4 - Alternative: do we simply keep the new rental on our own 1040 schedule E? If so what would the LLC report on its 1065?

What else should we know / should be aware of? [aside of course from "ask a lawyer / ask a CPA"]

[tagteam]

I'm going to page @Rick19744 for this but, in short, the property will go in to the LLC the same way it comes out of your MFJ reporting on Schedule E; there will be no recognition of gain.

In TurboTax, you will have to show the property as being disposed of other than by sale in order to stop depreciation and remove the property from your 1040 (Schedule E) for subsequent tax years. 

The property will retain the same characteristics it had when it was being held by the LLC (defaulting to a partnership) just prior to the transfer. You may have to use Forms Mode in TurboTax Business in order to get this transfer entered properly. 

Finally, YES, you should absolutely seek guidance from a local tax professional and/or legal counsel.

[Rick19744]

I agree with @tagteam and will add a few more comments:

• This may just be semantics in your wording, but you note "you sold it" and "did a proper [Section] 1031".  Just want to make sure there was an intermediary involved and you didn't really sell it or take any possession of cash.
• Essentially the LLC will "step into the shoes" of the property for tax purposes.
• On your personal tax return, you will just enter the applicable items to make sure there is zero gain or loss.
• Your current adjusted basis, depreciation, etc. will just carry over; the step into the shoes impact.
• Additionally, when this type of a contribution takes place, you need to look at the difference between the adjusted basis and FMV at the date of contribution.  Section 704(c) technically comes into play here, but if the LLC is only you and your wife, and are filing joint, not sure you would need to go down that road.
• Make sure you check any withholding requirements for the LLC as a result of nonresident members.  This will be an issue should the LLC generate income.
• Make sure you are registered to do business in OK.  
• Yes, your LLC will file it's own tax return, you will receive K-1's, and those will be entered into TT.
• And I will just confirm, you will be best served with getting help with the LLC accounting to make sure this starts out correctly.

[Mike9241]

@aysoref since OK is not a community property state and the entity owning the property is your LLC a partnership return would need to be filed. note that partnership returns are due 9/15 and you need Turbotax Business which only runs on windows PCs to do that return.  be sure to keep track of the deferred gain and the depreciation reported on your 1040. 

[tagteam]

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@Mike9241 wrote:

@aysoref since OK is not a community property state....

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However, whether or not community property law would apply is contingent upon the parties being domiciliaries of a community property state and not where the property is actually located.

[aysoref]

@tagteam 

What TT guided-walkthrough question allows me to indicate the rental was disposed of other than by sale ? Or alternatively, which line item / what verbiage on schedule E can I insert to indicate the rental was disposed of other than by sale ?

[aysoref]

@Rick19744 

• This may semantics in your wording, but you note "you sold it" and "did a proper [Section] 1031".  Just want to make sure there was an intermediary involved and you didn't really sell it or take any possession of cash.

Indeed, it was done through  an intermediary, by the book.

[tagteam]

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@aysoref wrote:

@tagteam 

What TT guided-walkthrough question allows me to indicate the rental was disposed of other than by sale ?

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It is the Sale of Property/Depreciation section. There should be a section where you indicate the transaction needs "special handling". 

You clearly just do not want to enter any kind of a sales price.