depreciation on rental property transferred to an LLC

[haddadtwins]

I transferred a rental property from my and my wife's personal ownership to an LLC that is owned by me and my wife.  How can I retain the original rental property purchase date for the LLC for depreciation purposes in TurboTax?

[DavidD66]

According to an article by Albert B. Ellentuck, Esq that appeared in the AICPA's publication "The Tax Advisor":

Generally, Sec. 721 provides that a member’s transfer of property to an LLC taxed as a partnership does not result in income or loss to the member or the LLC. The LLC steps into the shoes of the contributing member with respect to the holding period and adjusted tax basis of the contributed property (Secs. 1223 and 723). This general nonrecognition rule applies both to contributions made upon the formation of the LLC and to subsequent contributions by new or existing members.

In other words, your cost basis, depreciation, holding period, etc is the same for the LLC as it was for you personally.

[jhobryan]

The answer is fine, but TT Business wont let me put in the actual purchase date (only when the business started using the asset).  TT needs the actual purchase date to know when to stop depreciating the property.

[haddadtwins]

I had to calculate the remaining life for the rental property, then select a depreciation life close to that in TT Business to depreciate that asset over under the LLC.  I'll keep looking into this  to make sure there isn't a better way in TT.

[jhobryan]

thanks, the issue arises when the LLC is formed after the purchase date.  But all TT Business will accept is the date the LLC is formed.  So, again, how does TT know when to stop depreciating the asset?  This is a real issue for me because next year I hit 27.5 years of depreciataion on a rental.  But the LLC was only formed 2 years ago.

[Carl]

The start date of the business ***MUST*** be no later than the first day the property was placed in-service. That is the absolute only way possible to transfer the prior year's depreciation already taken, and do it "CORRECTLY". By your method, the depreciation has started all over from the beginning for the next 27.5 years and that's just flat out wrong since the property was not sold or disposed of by the original owner.

Remember, your Partnership/Multi-member LLC is *still* a disregarded entity for tax purposes.

So if asked in the program, the *business* started on the day the property was place in service, or earlier. But the "partnership" started on the date you established for that.

That is how you property transfer everything from your personal 1040 SCH E to the 1065 return SCH E.

On the 1065, remember you have to *add* *together* the prior year's depr *AND* the current year's depr from your *personal* return to get the correct total of prior depreciation already taken, for the 1065 return.

[jhobryan]

Excellent Carl.  So there are two dates that I enter, the date that the business started and the date that the LLC started.  I will go back and see if I can figure out how to do that in TT Business.

BTW, my wife and I jointly own the LLC.  Not sure about your "disregarded entity" comment?   Google says that single owner LLCs are disregarded entities.  I frankly dont understand the implications of being a "disregarded entity" but I suspect it doesnt apply in my case?

[shubhron]

Hi, I have the exact same Qs.  Did you find a way to put the two date?

I am losing 10 years worth of depreciation as my clock resets to 27.5 years

[Carl]

Not sure about your "disregarded entity" comment?

A single member LLC reported on SCH C as a physical part of your personal 1040 tax return and a multi-member LLC reported on IRS Form 1065-Partnership Return, is considered by the IRS to be a disregarded entity. That means that as far as the IRS is concerned, income earned by the business is no different that W-2 income earned by you personally. It's all "personal income" weather it's passive rental income, or non-passive earned income. In your case, the rental income is passive rental income.

Non-Passive Income - This is income paid to you when you go out an "do something" (usually on a recurring basis) to actually "earn" it. Non-passive income is sometimes referred to as earned income.

Passive income - Using rental income as an example of passive income,  Rental income is income you are paid, but you don't go out and "do" anything on a recurring basis to actually earn it. All you do is "sit there" and collect it.

So there are two dates that I enter, the date that the business started and the date that the LLC started.

If i recall correctly, that's not true for a multi-member LLC. You'll be asked the business start date only, and that's it. That date has to be on or before the first rental asset was placed in service. It doesn't matter if that date was years ago either.

[shubhron]

In the Business Info tab, I have to put the date when the LLC started doing business, I have out that as 1/1/2019 because that's when the LLC was established and the rental property was put into the LLC.  The rental property has been rented by me and my husband since 2010.  How can I put Date LLC was established as 1/1/2010?

[Carl]

The IRS considers an LLC to be a disregarded entity. That means that as far as the IRS is concerned, your LLC is not a separately taxable entity. Money paid to the LLC is no different in any way, than money paid to you personally. 

In the Business Info tab, I have to put the date when the LLC started doing business, I have out that as 1/1/2019 because that's when the LLC was established and the rental property was put into the LLC.  How can I put Date LLC was established as 1/1/2010?

I just confirmed in by copy of TT business that you don't do that for an LLC. So for you, the LLC started doing business 1/1/2010. Work back through the business profile (or whatever that first part is called in TT business) and change your business start/established date to 1/1/2010. That's it. Then (and only then) can you enter the correct in service date for your rental property as 1/1/2010 or any date "AFTER" the business started doing business.

The confusion is this. If you had established an S-Corp or C-Corp and put your rental property in that, then the business start date would be 1/1/2010 and the business "incorporation" date would be whatever day in 2019 you incorporated.

But an LLC is not a corporation. It's a Limited Liability Company that the IRS does not recognize as a separately taxable entity. Therefore the first day of business for your LLC would be 1/1/2010.

[shubhron]

Thank you do much!

[herrelko]

A superior answer that makes clear exactly what one must do when transferring a rental home with significant depreciation history, and with more years and more basis left to depreciate.  Thank you!

[mrcabe]

Good afternoon TurboTax Community:

Last year, 2022, we transferred a couple of rental properties to two LLCs. One of the LLCs was established in January and the other in March.

• There was no sale, just a transfer. We understand there is no tax implication. Would you help us confirm?

We have been depreciating both properties on Sch E but for 2022 we understand we need to begin using form 8825 instead of Sch E and a couple of questions came up regarding depreciation:

• For the LLC established in January, all income was reported under the LLC. Do we report the depreciation amount on 8825 as we have done on Sch E? Is there a statement that we need to attach to the form for the IRS to know that the property was on Sch E and now is on 8825?
• For the LLC established in March, 1/4 of the income was reported to us and 3/4 was reported under the LLC. We have to file a Sch E for the portion of income reported under us. What amount do we report for depreciation? A 1/4 of what have been reporting in our Sch E for prior years and the other 3/4 under 8825?

Thank you for your help!

[PatriciaV]

Yes, transferring a rental property to an LLC has no tax implications as long as you record the transaction properly. TurboTax will help you with these entries, both on your personal return (Schedule E) and for your LLCs. You will need to split your income and expenses at the point of transfer yourself. TurboTax will calculate depreciation expense, however, based on the time the property was owned by each entity.

Schedule E (Form 1040): Report that you stopped using this asset on the date of the transfer. Indicate this requires special handling as a conversion to personal use. Choosing this option allows TurboTax to record the change without a gain or loss.

How you report these properties for your LLC depends on the type of LLC you have, some continue to report on Schedule E (Form 1040), others report on a business return. See this post for specific help: Where do I report rental activity for an LLC?

Here's a summary of how to record these transfers in TurboTax: How do I enter a rental property I contributed to a partnership or LLC?

@mrcabe