I have 5 rentals (no liens) that have been reported under Schedule E. I have moved them to three two-member LLCs. I have completed forms 1065 and K-1s. When I attempt to remove them from my Schedule E TurboTax said that they must continue there. How do I remove them from my personal return and show them moving to the LLCs?
When you transfer properties between individuals - or between individuals and LLCs - it counts as a sale. The LLC receives the value of the property and you receive an interest in the LLC equal to the value of the property.
You need to show this as a disposal in order to remove the rentals from your tax return. You can show it as a sale or transfer at the exact value that the properties currently have so that there is no gain or loss.
The IRS is looking for those properties on your tax return so this is how you inform them that they will no longer be there.
@RobertB4444 wrote:When you transfer properties between individuals - or between individuals and LLCs - it counts as a sale. The LLC receives the value of the property and you receive an interest in the LLC equal to the value of the property.
You need to show this as a disposal in order to remove the rentals from your tax return. You can show it as a sale or transfer at the exact value that the properties currently have so that there is no gain or loss.
The IRS is looking for those properties on your tax return so this is how you inform them that they will no longer be there.
No, no, no.
While it is possible that the Partnership actually bough the properties from the Individual, there is no indication that was done.
Generally, an individual Partner can do a tax-free contribution to a Partnership.
If the property was not sold, it should NOT be entered as a sale in TurboTax and should NOT show up as a sale on the tax return.
I think @RobertB4444 may have misinterpreted your post. As I read your post, I do not see a sale of any kind here.
Unless there was an actual transaction where money changed hands, this is not a sale by any stretch.
On your personal tax return in the SCH E section, you "MUST" work through the assets/depreciation section and show each individual asset, one at a time, as "removed for personal use".
If you have any vehicle expenses associated with a rental property (even if less than 100% business use) then you must work through the vehicle section and show the vehicle as removed for personal use also.
There is no sale here that I see. So you will not report this as such.
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.
[Edited 01/22/2024]
Thank you so much for your answer and clarification. I have a follow up question changing the scenario a bit.
Instead of the rental properties being transferred(sold) to LLC now they will be listed in SCHEDULE C because services were rendered in 2024 vs before they were rental properties under SCH E.
I read the statement below in a and would love your input please! Basically how it should be done... SOLD or PERSONAL USE when properties did not change name in 2024.
"All assets (including the property itself) on SCH E are converted to personal use on a given date. ....When you enter the assets on the SCH C, you must reduce your cost basis in those assets by the amount of depreciation already taken. The "in service" date for the asset on the SCH C *MUST* be at least one day *AFTER* you converted it to personal use on the SCH E. Then the depreciation process starts all over from year one." LINK: Re: If you provide substantial services that are primarily fo...
Thank you
You'll convert to personal use in schedule E for the rental property. Then you'll depreciate it as a brand new property starting the next day with a starting depreciation basis equal to the ending basis that the property had on schedule E. You'll enter that in the assets section of your schedule C business.
@Mona2025 wrote:
Instead of the rental properties being transferred(sold) to LLC now they will be listed in SCHEDULE C because services were rendered in 2024 vs before they were rental properties under SCH E.
Delete the asset in the rental/Schedule E asset.
Enter the asset in Schedule C using the original "placed in service" date and the original Basis (cost). In most cases, it will now be depreciated over 39 years, rather than 27.5 years.
For anybody that disagrees with my comments, look at Regulation §1.168(i)-4(d).