Moving Property to another LLC and transfer depreciation table

I think the confusion is that you are mixing up “single entity LLC” versus “single member LLC”.  The property was moved to a “single entity LLC” which means only one property is allowed inside the LLC.  The ownership of the new LLC is the same as previous LLC (myself and my brother).  The old LLC still has 3 other properties in there (same ownership) so it will not get dissolved.  Hope that clears the confusion.

Hope that clears the confusion.

Yes, a bit.

For the new LLC, you have to reduce the cost basis of all assets by the amount of depreciation already taken on those assets. Then depreciation starts all over from year 1 for the next 27.5 years using the new cost basis. Note that the cost basis of the land will not change, since land is not depreciated. Example:

Property purchased 2005 for $100,000.

Property placed "in service" in 2008 allocating $20,000 to the land and $80,000 to the structure.

In 2021 $40,000 of depreciation is already taken on the structure when it's transferred to a new business with the same owner(s).  So for the new business the cost basis of the structure must be reduced by the $40,000 of depreciation already taken on it, and it's in service date will be the date the new business acquired the property. So for new business:

Land cost basis: $20,000

Structure cost basis: $40,000

The structure gets depreciated over the next 27.5 years based on the reduced cost basis.

Now, when you sell the structure it's up to you to remember the $40,000 of depreciation already taken on the property, so that it's properly recaptured and taxed in the year you sell the property.

Now for the details of how you deal with this on the K-1's as far a partner contributions and partner share goes, I'm a bit sketchy on that. There are other's that I'm sure are following this thread who are better versed in that arena, if you need more detailed assistance with that.

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@Rockdog10 wrote:

I think the confusion is that you are mixing up “single entity LLC” versus “single member LLC”.  

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Never heard of a "single entity LLC". 

@Rick19744 

I will add some commentary and possibly a few questions:

• I agree for tax purposes there is no such nomenclature "single entity LLC"
• Not sure who or what document used that description, but that is really not relevant for tax purposes.
• This just sounds like some Fannie Mae lingo that they came up with to indicate that the entity is only allowed to own one property
• A few questions
  • Who owns what you are calling a "single entity LLC"?
    • Does your original multi-member LLC own this entity?
    • Or do you and your brother own this entity separate from the original entity?
  • Did you obtain a new EIN for this entity?
  • What did you call this entity if you completed a SS-4
  • What box did you check on a SS-4 line 9a?
  • Who helped you set up this structure? 
  • Does this new entity have a new legal name?
  • What is the name on the deed?

Yes, "single entity LLC" is Fannie Mae jargon as for a qualification for the the loan as it is non-recourse and need to have no other properties in it for liability reasons.  For tax purposes, this is just a standard multi-member LLC.  My brother and I own the LLC separate from the original entity.  The new entity does have a new EIN and is filed taxed as a partnership.  Our lawyer did setup this new entity for us and it does have a new legal name in which the deed was transferred to.  

I read on some of the other forums that technically we should have quitclaim deed from the old LLC to our personal names first, then from our personal names to quitclaim to the new LLC.  Our lawyer told us it was unnecessary at the time, but I'm thinking it is more of a tax issue than legal.  Any thoughts? 

Our lawyer told us it was unnecessary

I wonder about that. But I assume that the lawyer is familiar enough with tax law as well as the liability issue to know what he's talking about. So I'd go with what the lawyer says. Besides, the "people" who hold ultimate liability did not change. Only the entity changed.

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@Rockdog10 wrote:

Our lawyer told us it was unnecessary at the time, but I'm thinking it is more of a tax issue than legal. 

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Most likely due to the fact that the IRS would search the public records if they were really interested. The only other method would be for the IRS to send the responsible LLC member a letter asking for a copy of the deed(s) and, frankly, between the parties here (who are all technically related), any deeds could be drafted with a backdate and then sent in. 

There are a lot of people who believe that recording a deed is required to effectively transfer title to real estate, but that is generally not true. Recording serves to give (record) notice to third parties as to who owns the property (it is matter of priority).

There are a lot of people who believe that recording a deed is required to effectively transfer title to real estate,

The term I like to use is a legal "technicality". 🙂

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@Carl wrote:

There are a lot of people who believe that recording a deed is required to effectively transfer title to real estate,

The term I like to use is a legal "technicality". 🙂

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However, that would be wrong. 

Again, recording deeds serves to put the public on notice as to who owns the property. If the deed is never recorded, that does not negate the transfer of title. Recording is not a "legal technicality", failing which would render the transfer ineffective between the parties.

Okay.  With the additional information, my follow-up comments are as follows:

• Essentially what you have is a partnership division under Section 708 of the Code and applicable regulations.
• In this case, you will have a "divided" partnership and a "recipient" partnership.
• In your case, the "divided" partnership is the original partnership, and the "recipient" partnership is the new partnership.
• Since I don't have any details, and most likely nothing was documented, we will assume that this was an assets-over transaction.  This is the default transaction if no other form was documented.
• When one of the resulting partnerships qualifies as the divided partnership (which your original partnership qualifies),  it is considered to contribute certain assets and liabilities to one or more recipient partnerships (your new partnership) in exchange for interests in such recipient partnerships and then distribute the interests to some or all of the divided partnership's partners in complete or partial liquidation of those partners' interests in the divided partnership.  In your case, you are distributing this new interest out to you and your brother in the same ownership ratio.
• This distribution amount will be the adjusted basis of the property that was transferred to the new partnership.
• You will essentially step-into-the-shoes of this property with the new partnership; same depreciable life, holding period, method, etc.  Essentially as if nothing changed; as in essence, nothing did.
• Your tax capital basis in the new partnership will equal the adjusted basis of the property transferred.
• There are other items that should be documented such as FMV of this property at the transfer date.  This would come into play if you added another member; built-in gain issue and Section 704(c) allocation.
• Both partnerships are considered "continuing" partnerships since both have members that owned more than 50% of the prior partnership.
• A resulting partnership that is treated as the divided partnership (your original partnership) must file a return for the tax year established by the prior partnership and retain the prior partnership's tax ID, tax accounting methods, and tax elections. The return must include a statement that the partnership is a continuation of the prior partnership. (This should also be written across the top of the first page of the return.) The statement must list the distributive shares of the partners for the period up to and including the date of the division and for the period after that date. The statement must also include the names, addresses, and tax IDs of all other resulting partnerships that are treated as continuing partnerships (the new partnership).
• Resulting partnerships that are regarded as continuing partnerships (the new partnership), but not as the divided partnership, still remain subject to the prior partnership's accounting methods and tax elections.  Essentially the new partnership must maintain all accounting methods and elections as your original.
• These continuing partnerships must also include a tax return statement disclosing the name, address, and tax ID of the prior partnership.  This means that your new partnership must include such a statement.

As you can see, there are numerous issues that need to be addressed and documented.  To get this right, you may want to consult with a tax professional for the year of the division.

Thank you for all the well-in-depth discussion and reply.  I'm certainly grateful and appreciated of it.  I think I have enough to go on for the correct direction and will check with a tax consultant to make sure everything is in place and in order.  Great forum you guys have here with some real experts!

Welcome.  Our bill will be emailed to you shortly !!!😂

If we are stepping-into-the-shoes of this property with the new partnership using the same depreciable life, holding period, method, etc.  starting 10/1/2021, do we depreciate all the previous assets from the old LLC up to 9/30/2021 and "step in" the depreciation on the new LLC from 10/1/2021 to 12/31/2021?  That seems rather complicated to do in Turbo Tax.  

@Rockdog10  Not really.  Just finish the old LLC return first.  Then you'll have the final numbers for depreciation and everything for the asset.  Enter those final numbers as the beginning numbers manually in to the new company and you're set.

Enter those final numbers as the beginning numbers manually in to the new company and you're set.

It's a bit trickier than one might think. If you find the first year depreciation with the new company is wrong, just holler. 🙂

This certainly is quite challenging to do manually since we have over 100+ items from previous years.  I had an idea of doing a "save-as" from the previous LLC and just change the LLC information to the new one to transfer the existing depreciation table over.  Any possible issues with doing this if I clean up all the other items from the old LLC file?

I had an idea of doing a "save-as" from the previous LLC and just change the LLC information to the new one to transfer the existing depreciation table over.

Oh, if it were only that simple. When it comes to taxes, if it was easy, you did it wrong. 🙂

Not at all - as long as you're careful to remove any lingering data from the old company.

Now, I am realizing how 'tricky' this is.  From my old LLC, for all existing assets to be transferred to the new LLC, would I select the option "sold" or "disposed of by some other means" on why I stopped using this asset.  If so, would I select the "sold" price as the depreciated value so it would not trigger a gain or loss in my existing return.  I somehow need to registered that I stopped using this asset on 9/30/2021 without saying there was a change in ownership since the ownership of the two LLCs are the same.  Any ideas on this?

@Rockdog10 now you see the issue. Here's how you do it correctly.

For the old business for each individual asset indicate "I stopped using this asset in 2021" and enter the date you stopped using it. On the "Special Handling Required?" screen, read the small print to understand why I am telling you to click YES. Then click YES.

Now add together the amount of prior years depr and current year depr to get the total depr taken on that asset up to the date you stopped using it. It's up to you to save that information somewhere outside of TurboTax, because you will 100% need that amount at sometime in the future. I guarantee it.

When you enter the asset in the new business, the cost basis of that asset in the new business will be the original cost basis from the old business *MINUS* the total amount of depreciation already taken on the asset in the old business. Your in service date for the asset in the new business can not be earlier than the opening date of the new business and *must be* at least one day *after* it was removed from service in the old business.

Depreciation will start over from the 1st year using the new, adjusted cost basis. So the yearly depreciation on the asset in the new business, will be lower than the yearly depreciation was on the asset in the old business.

Now, it's up to you to keep track of the original cost basis and depreciation taken in the old business. When you sell or otherwise dispose of the asset later in life, you will have to account for that depreciation in the tax year you sell or otherwise dispose of the asset. If you don't, then the depreication from the old business will be included in capital gains and taxed at the higher capital gains tax rate, instead of the "ordinary" income tax rate.

Read @Rick19744's post again (above). 

Hi Rick19744,

Thanks for this explanation of how to transfer a depreciation schedule from one LLC to another, when the ownership of the divided and recipient partnerships remain the same and there is essentially "no change" to the ownership of the property.  I am in the exact same situation this tax season.  

At the end of your post, your recommendation was to work with a tax professional on this.  I am more of the "do it yourselfer" persuasion (which is why I use TurboTax to do my taxes).  After looking into the different button and options available to me in TurboTax Business desktop, I don't see the buttons to do what you are recommending.  Is there a way to do what you are recommending in TurboTax Business desktop?  Or is the software limited, where doing this isn't possible.  If it is possible, would you be willing to detail what buttons to push and what pulldowns to choose to do what you are suggesting?  

Best regards,

Andrew (TheGenCom)

For professional help, you would need to use the online software, TurboTax Business.

You are welcome to ask for help here in the community and we will do our best. I have to agree, having someone do your taxes this year, makes a lot of sense.