How to reflect in K-1 and in Form 8582, losses from a rental that was transferred to LLC

[Cmora]

A rental property was transferred to a 100% owned LLC 1/1/2024.  The rental had unallowed losses in prior years on Form 8582 line 1C. How do I reflect these in the K-1? In my personal form 8582, do I just add to the existing number prior to the transfer?  Thanks in advance

[Mike9241]

are you saying the property was distributed from a partnership to your single-member LLC? if so,  I suggest seeing a tax pro because in certain situations, gain must be recognized that isn't on the k-1

on the other hand if you own 100% of the property and then put it into an LLC - a 100% owned (single-member LLC) does not file its own tax return. It's a disregarded entity, so you continue to use schedule E. 

[Cmora]

The rental is owned by my husband and myself.  We own the LLC so I was expecting no impact at transfer. There are K-1s because our children own 5% of the LLC.  Should I override the balance it calculates?   Thank you for your help! 

[PatriciaV]

If you own an LLC with anyone other than your spouse, the LLC is considered a partnership and must file a separate tax return. As Mike9241 mentioned, you may wish to contact a local tax professional to assist with filing the business return (which was due March 15) and reporting the transfer of the property.

[Cmora]

Thanks for your response. I did file an extension on the business waiting to see how to address this transfer of the properties from rental to LLC. In another Q&A, it said to process as a sale in personal return at current nbv and reflect that as the contribution for the LLC. Now that I did that, I am not sure what to do with the carryover losses. I think I would consolidate the PY losses from the transfer property with the PY LLC losses since its a transfer of the property. (its from a joint return to an LLC). Does that make sense? Do you agree?

The "sale" of the property on our personal return has generated depreciation and a deductible rental real estate loss. I do not know how this gets calculated as the transfer was done 1/1/2024 using the values in 2023 filing. Is this correct? Should I override these?

Thanks again and I appreciate any assistance!

[PatriciaV]

The passive losses generated while you personally held the property remain with you. They are not transferred to the new entity. In other words, they become passive loss carryovers for your investment in the LLC. These are entered under the Schedule K-1 topic.

For the rental property, on the page titled "Do Any of These Situations Apply to This Property?" be sure you checked the box under Converted: "I converted this property from a rental to personal use in 20XX." This option should bypass the need to enter sale information.

When you report you stopped using the rental assets, you may have depreciation recapture for some assets.