Moving Property to another LLC and transfer depreciation table

[Rockdog10]

I recently refinance a loan using a Fannie Mae Small Apartment Loan which required me to move my property that was held in a partnership LLC that held multi properties to a new LLC that was a single entity LLC.  The ownership for both LLCs is the same (just my brother and I).  From what I read on the forum, the multi-member LLC is a "pass-through" entity, so the IRS does not see it as any change in ownership, even though we moved it to a new single entity LLC on deed.  If this is the case, do I just move the current depreciation table from my old LLC to the new one.  If so, how do I close the property out on TT Business with the old LLC and how would I move the depreciation schedule over to the new LLC.

[Carl]

recently refinance a loan using a Fannie Mae Small Apartment Loan which required me to move my property that was held in a partnership LLC that held multi properties to a new LLC that was a single entity LLC. 

Are you still a member of the multi-member LLC? Does the multi-member LLC still exist? Or was it disolved in 2021? Note that a multi-member LLC can not exist with only one member. If there were only two members and one of the members left and a new member did not replace them, the multi-member LLC has to be dissolved with all assets and liabilities disposed of some how.

The ownership for both LLCs is the same (just my brother and I). 

Wait a minute. If by "both LLC's" you are referring to the multi-member LLC the property is removed from, and the LLC the property will be placed in, then the LLC the property will be placed in can not be a single member LLC as you identified above, if "just my brother and I" both own it.

From what I read on the forum, the multi-member LLC is a "pass-through" entity, so the IRS does not see it as any change in ownership, even though we moved it to a new single entity LLC on deed. 

That is correct. But the way I'm understanding your post is very confusing.

If this is the case, do I just move the current depreciation table from my old LLC to the new one. 

Nope. Not that easy. Generaly rule of thumb with taxes:  If it was easy, you did it wrong. 🙂

If so, how do I close the property out on TT Business with the old LLC and how would I move the depreciation schedule over to the new LLC.

You don't "move" anything per-se. The multi-member LLC needs to be disolved and the 1065 along with the K-1's marked as "final". All assets need to be disposed of - usually by distribution to the members in a manner consistent with their ownership percentage in the multi-member LLC. Unless you have some special kind of multi-member LLC that you set up, for a 2-member LLC all assets/liabilities are distributed 50% to each owner.

Now I myself am not that "up to snuff" on the 1065 return stuff when it comes to dissolution. But I do have somewhat of a clue how to deal with the property when it comes to entering it on your personal 1040 tax return. With a filing deadline of March 15 for your final 1065 and final K-1's, you need to deal with that first and foremost.  You can't even start your personal 1040 return until the 1065 is done and all K-1's are issued.

• TurboTax Business Windows

[Carl]

recently refinance a loan using a Fannie Mae Small Apartment Loan which required me to move my property that was held in a partnership LLC that held multi properties to a new LLC that was a single entity LLC. 

Are you still a member of the multi-member LLC? Does the multi-member LLC still exist? Or was it disolved in 2021? Note that a multi-member LLC can not exist with only one member. If there were only two members and one of the members left and a new member did not replace them, the multi-member LLC has to be dissolved with all assets and liabilities disposed of some how.

The ownership for both LLCs is the same (just my brother and I). 

Wait a minute. If by "both LLC's" you are referring to the multi-member LLC the property is removed from, and the LLC the property will be placed in, then the LLC the property will be placed in can not be a single member LLC as you identified above, if "just my brother and I" both own it.

From what I read on the forum, the multi-member LLC is a "pass-through" entity, so the IRS does not see it as any change in ownership, even though we moved it to a new single entity LLC on deed. 

That is correct. But the way I'm understanding your post is very confusing.

If this is the case, do I just move the current depreciation table from my old LLC to the new one. 

Nope. Not that easy. Generaly rule of thumb with taxes:  If it was easy, you did it wrong. 🙂

If so, how do I close the property out on TT Business with the old LLC and how would I move the depreciation schedule over to the new LLC.

You don't "move" anything per-se. The multi-member LLC needs to be disolved and the 1065 along with the K-1's marked as "final". All assets need to be disposed of - usually by distribution to the members in a manner consistent with their ownership percentage in the multi-member LLC. Unless you have some special kind of multi-member LLC that you set up, for a 2-member LLC all assets/liabilities are distributed 50% to each owner.

Now I myself am not that "up to snuff" on the 1065 return stuff when it comes to dissolution. But I do have somewhat of a clue how to deal with the property when it comes to entering it on your personal 1040 tax return. With a filing deadline of March 15 for your final 1065 and final K-1's, you need to deal with that first and foremost.  You can't even start your personal 1040 return until the 1065 is done and all K-1's are issued.

[Rockdog10]

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.

[Carl]

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.

[tagteam]

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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 

[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?

[Rockdog10]

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? 

[Carl]

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.

[tagteam]

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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).

[Carl]

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". 🙂

[tagteam]

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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.

[Rick19744 · Accepted solution]

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.

[Rockdog10]

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!

[Rick19744]

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

[Rockdog10]

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.