How To Add Rental Property To Multi-Member LLC and Continue Existing Depreciation

[ND207]

We formed a new LLC in 2023.  The two members of the LLC owned a rental property as tenants in common and transferred their respective interests in the rental property to the LLC.  Each member had been taking depreciation with respect to the rental property for several years before the recent transfer to the LLC.

In Turbo Tax, when trying to add the rental property as an asset of the LLC, the in-service date of the rental property cannot be prior to the date the business of the LLC started (which was 2023).  As a result, we are unable to account for accumulated depreciation with respect to the rental property as of the date of the transfer to the LLC, and the depreciation going forward is all screwed up (bc it will not be the same as it would have been if members continued to own the real property individually).  

I found several posts that discuss this issue, but did not find an actual fix/solution.  Is there one?

[DavidD66]

To adjust your accumulated depreciation so that it matches your history prior to transferring to the LLC, you will need to enter it directly on the Asset Entry Worksheet under Schedule E.  To do so, switch to Forms mode.  Under "Forms in My Return".  You can enter/change date placed in service, accumulated depreciation, etc.  

[ND207]

Thank you for the response.

I think using form mode works, but I'm still having a couple issues I'm hoping you can help me with.

One of the members started taking depreciation on the property 2/26/21, so in form mode I entered that as the in-service date.   The property was effectively transferred from member to LLC 6/1/23, so member is taking depreciation attributable to 1/1/23-6/1/23, and LLC needs to account for depreciation for 6/1/23-12/31/23.  I entered under "Prior Depreciation" on worksheet the total amount of depreciation taking by member prior to the 6/1/23 transfer (i.e., from 2/26/21-6/1/23).  I also inserted 6/1/23 as "Date Acquired", but Turbo Tax thinks that is an error.

1)  How do I spilt depreciation for 2023 so only part year passes through LLC (i.e., depreciation for 6/1/23-12/31/23)?  

2) Using form mode, depreciation schedule generated by Turbo Tax (using SL/MM) shows correct annual depreciation, except for current year.  For current year, it's a smaller number (but still not number it should be if accurately split depreciation between member and LLC as of 6/1/23).   What would be causing that?

THANK YOU AGAIN!!

[RobertB4444]

While entering it into forms mode works that is not the easiest or best treatment for this issue.  Instead, you should treat this as a new asset that was acquired by your LLC on 6/1/23.  It was purchased for the exact amount that was the remaining depreciable basis for each partner on the date of transfer.

The basis in the property transfers.  And for the LLC this is a new asset so it will depreciate this new basis over the full 27.5 years of the rental property's useful life.  

@ND207 

[Rick19744]

@RobertB4444 your solution is not correct.

Contribution of property into an LLC taxed as a partnership is a step into the shoes transaction.

As such, lives, methods, holding period all carries over to the LLC.

The depreciation does not start over.

[ND207]

For what it worth, after a week trying to figure this out and three separate calls to the Turbo Tax phone support line that did not get me anywhere, I have come up with the following fix (which is far from perfect):

1) I am entering 6/1/23 as in-service date for all assets previously depreciated (even through that is not accurate bc the LLC is suppose to step into the shoes of the contributing members and continue same in-service dates and same depreciation schedules as the contributing members were using).

2) Even though it shows as an error, in forms mode I'm adding accumulated depreciation the members took on the contributed assets prior to transferring to LLC on 6/1/23.

3) To the extent applicable to each asset being depreciated, I'm electing not to take the special depreciation allowance for first year (because that would screw things up).

4) Steps 1-3 above results in a Depreciation Report that is fairly accurate for the LLC's 2023 tax year (current depreciation for LLC for 6/1/23-12/31/23 is correct [or tad low] and accumulated depreciation is correct [i.e., reflects total depreciation taken by members up to transfer to the LLC on 6/1/23]).  Only real issue is that in-service dates are not what they should be.

5) I intend to print the return, attach a separate page to the Depreciation Report explaining why in-service dates are not what they should be (i.e., bc of limitations of Turbo Tax software), and mail return to IRS.

6) Next year (on 2024 tax return) I will change the in-service dates to what they originally were for the  contributing members and the Depreciation Report and remaining depreciation schedule should be accurate from that point on (as if LLC stepped into shoes of the contributing members).

If anyone sees any major issues with my solution, please feel free to chime in.

Thanks!   

[Rick19744]

A couple of comments related to your recent follow-up post:

• TT software is designed for the masses.  When you get into more complicated situations, such as what you have, things just don't go smoothly.
• I would include a footnote / attachment with the return explaining what occurred and the software limitations you were facing.
• You may get a notice since the software results are "fairly accurate" using your words.
• Make sure you maintain more accurate records in excel or some other format to be able to support the history for your position.  
• Not sure you will be able to get exactly what you are anticipating on next years return.