Personal property deeded to our LLC; I'm a bit confused as to where to begin

[christopherJasonShields]

Good morning, 

I'm new to doing our own business, an LLC, taxes for a rental property. Mid 2020 is the first time we've rented the property. I was originally doing things under "rental property", got stuck and a Turbo Tax expert said that we needed to do it under Turbo Tax business since my wife and I are 50/50 partnership in our LLC. 

So I paid for and downloaded Turbo Tax Business. And I'm stuck at Member Capital. In particular, under "Property Member contributed to LLC".

Here's why; this condo was our personal residence, we lived there for many years, since 2007, paid off the mortgage, decided that it was time for a change, bought a house, and decided to rent the property. In doing so, our former accountant recommended that we transfer the property to our LLC via a quitclaim deed. So we did. So basically, we gave the property to our LLC- so far so good.

Now under "Property Member Contributed to the LLC" would that be $0 since it was given to the LLC, half (because it's a 50/50 partnership) of fair market value (according to Truila, Zillow, etc), half of what we bought it for in 2007 or something completely different?

Thank you very much

[Anonymous_]

This is a nonrecognition event and the LLC essentially steps into the shoes of the contributing members.

In short, the LLC acquires the holding period and adjusted basis of the contributing members.

[Carl]

a Turbo Tax expert said that we needed to do it under Turbo Tax business since my wife and I are 50/50 partnership in our LLC.

I have no idea why a so-called expert would tell you that you "need" to do this on a physically separate tax return that requires you to pay for another program that you do not need. Since you are filing a personal 1040 joint return (I assume) the need for TurboTax Business (which is not cheap) is completely uncalled for.

May I suggest you request a refund? Then I can assist you with reporting all of this on your personal 1040 tax return. Otherwise, if you want to go ahead and file the partnership return, I can help.

However, understand that filing the partnership return "WILL" create more unnecessary paperwork and "may" result in a late filing penalty, since the partnership return was due on March 15th. The late filing penalty for the partership return is $200 per month, per partner. So as it stands right now with a partnership return, you're looking at a $400 late filing penalty. On Apr 16th, that jumps to $800.

So I suggest you report this on your 1040 personal tax return only.

Weather you do this on your personal tax return or on the 1065 partnership return, the rental will still end up on SCH E as a part of your personal 1040 tax return and the rental income/expenses are still passive. 

Overall, it's a waste of time and money putting a rental property into an LLC, and can have the potential to create legal problems down the road.  For you, since the property is paid off there's no mortgage lender to deal with on that front. But the insurance company could be a different matter.

I'm willing to help with this either way you want to go If so:

- Who is the named property owner(s) on the property deed?

-Who is the named insured beneficiary on the property insurance policy?

[Anonymous_]

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@Carl wrote:

Since you are filing a personal 1040 joint return (I assume) the need for TurboTax Business (which is not cheap) is completely uncalled for.

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It is not uncalled for unless the parties (the spouses ) hold their interests as community property in a community property state. Otherwise, a Form 1065 would be required to be filed.

[Anonymous_]

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@Carl wrote:

Overall, it's a waste of time and money putting a rental property into an LLC, and can have the potential to create legal problems down the road. 

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No, it is not necessarily a waste of time and money to put a rental property in an LLC. As a blanket statement, that is simply misleading and false in some instances.

LLCs do offer some legal protection (from personal liability) provided they are otherwise operated in accordance with state law and regulations, books and records are maintained, and personal funds are segregated.

[christopherJasonShields]

Carl,

Sorry for the delayed response. I was under the weather and then work became insane.

So far one Turbo Tax expert told me that I just needed to do it under my personal taxes, as I was trying to do it as a "small business owner" (because that's what we are) under "rental property". So that's the route I started to go down. Then I ran into the same question about, basically, how much is the property worth since it's paid off and deeded to the LLC. That's I clicked the live help button again, got a call from another Turbo Tax tax advisor who told me that I was wrong and had to do it through Turbo Tax business, get a K1 and then that THAT back to my personal tax.

Last year we had H&R Block do things (we weren't happy with their service, so decided to do it on our own) and we ended up owing more to the government through our personal taxes because of the business because of something about how if flows through to our personal taxes- but I'm not sure how they did it. I might have to take a closer look at their documents again- it's not in "English", lol.

I'd rather just do it through our personal taxes. At the end of the day, we lost money due the fact that we didn't rent it until halfway through the year, HOA fees, repairs, and appliance costs. I'd rather not spend more than we have to.

So what ever advice you can give would be great.

As to why we have a Partnership LLC vs just renting it out as ourselves- it was recommended because our properties (used to have 2, but sold one off and plan on selling this one off eventually) including our personal property. The recommendation here was to have the LLC protect us should we ever get sued because our property, rental or personal, was now an attractive asset for an attorney to go after because no bank held the deed. So that the money would flow through, or from (as we put money in for repairs, buying property, etc) us as individuals, but the property would be protected. 

Just for note, we don't get a "salary" from the business. The intention is to save the money, us it for expenses or to buy properties. So we don't use it as personal income. Any money we make stays in the bank. If it needs money, we've put personal contributions in. 

[Irene2805]

To answer your original question, the value of the property you contributed to the LLC is your half of the adjusted basis of the property at the time you deeded it over to the LLC.  Your wife's contribution would be her half. [26 U.S. Code § 723.Basis of property contributed to partnership]

The TurboTax expert was correct in that a multi-member LLC should file a partnership return.  However, you can file as a Qualified Joint Venture on the 1040, with a schedule C for each of you, reporting your share of the income and expenses.

Please see these discussions for more information:

• Solved: How should a husband-wife LLC file?
• Solved: Qualified Joint Venture - TurboTax
• Qualified Joint Venture - TurboTax

[Anonymous_]

@christopherJasonShields and spouse cannot file as a QJV unless they hold their interests in the LLC as community property in a community property state.

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to married couple state law entities in community property states.

See https://www.irs.gov/pub/irs-drop/rp-02-69.pdf