Transferring Property from LLC to Personal / How can I prorate depreciation

[Erik1963]

I got divorced in 2021 and got 2 properties from a joint LLC (me and my ex were LLC partners) transferred to me personally. The LLC has been dissolved. I will get a K-1 for Q1 2021 rental income, and will account for the properties on my personal income tax filing (Schedule E) for the remainder of the year. So while these property were in business use 100% of the year, I should only claim 75% of the year depreciation. The other 25% will be reported in the 1065 of the LLC. How can I do this in TurboTax. I cannot manually override the calculated annual depreciation. 

[PatriciaV]

If you enter the actual date that you took control of the property (ownership was transferred to you), TurboTax should calculate the appropriate portion of depreciation for the period you owned the property.

For example, if you took ownership on April 1, you owned the property for nine months, which is 75% of the year. If total depreciation is $1,000 for the year, you should see $750 on the Depreciation Report.

[Carl]

In the end, you will show two properties on your SCH E. One for the final K-1, and one for you with 100% ownership.

For the final K-1 when you enter it on your personal tax return, you'll report it "as if" nothing changed, other than the partnership disposed of the LLC.

When you enter the property on SCH E in your personal tax return, you'll reduce the cost basis of the structure by the total amount of depreciation already taken on the property. Then depreciation will start over from the new cost basis, for the next 27.5 years.

Note that you will reduce the cost basis of the structure only, not the land.  So in TTX:

COST: This will be reduced by the amount of depreciation already taken on the property.

COST OF LAND: this value will not change.

When completed, page 1 of the SCH E will show what is considered a "new" rental property with the reduced cost basis. Page 2 of the SCH E will have the information from the final K-1.

[Erik1963]

Thanks. That is helpful. But making sure I understand. The K-1 on my my schedule E does not actually list specific properties. Just mu share of the income from a portfolio of properties in the LLC. So my 2021 schedule E will list income form the K-1 (for Q1) and income from the 2 properties that were transferred to me during the year (correct?).
For those two properties, I enter acquisition date of 4/1/2021 at the book value (purchase price minus prior depreciation) and start depreciation for a new 27.5 years (correct?).
This raised one question. The IRS will want its depreciation recapture tax if I ever sell. How do I capture the depreciation that happened before 4/1/2021 associated with this property? If I enter acquisition data 4/1/2021 and "date I started using this as a business" as 4/1/2021 I cannot enter prior depreciation anywhere. Obviously I do not want to create a taxable event and just transfer the partially depreciated asset from LLC to me personally. 

[Anonymous_]

This being a liquidating distribution, @Rick19744.

[Erik1963]

So if I ever sell it do I just have to dig up the prior depreciation (from years it was in the LLC) to calculate depreciation recovery tax liability, as well as my original cost basis to determine capital gains?  

[Carl]

Yes. When you complete your 2021 tax return you'll want to print out the two 4562's for that property that print in landscape format, from the partnership return. If there's any passive loss carry overs you'll also need to print the 8582 and keep it.

[Erik1963]

Brilliant. I think I know how to report this correctly now.  

[Rick19744 · Accepted solution]

This issue (liquidation of a multi-member LLC) is WAY more complicated and none of the responses have addressed your question:

• There are a number of questions that need to be addressed.  You have not mentioned whether the LLC tax return is being prepared by a tax professional.
  • Hopefully it is, as you will need to obtain detailed information from this individual
• We don't know what assets are involved as you only mention that you will receive two properties
• What is the spouse receiving in this winding down event?
• Hopefully you have maintained your outside tax basis, as this is key.
• Is there debt on the books and how is that being handled?
• In general, when there is a liquidating distribution of property from a partnership (LLC taxed as a partnership), the property takes a "substituted" basis.  This is where your outside tax basis comes into play and is important.
• There are tax regulations that come into play in determining how to allocate your outside tax basis to the properties received in the liquidating distributions.
• These rules also impact depreciation going forward.
• When property is distributed out, the member steps into the shoes of any depreciation recapture in the future.

As you can see, this gets complicated very quickly and I recommend you consult with a tax professional to help you work through these issues.

[Erik1963]

Thanks. This is more in line with was I was expecting to hear.

Thankfully, the LLC accounting was done by an accounting firm. They will also prepare 1065 for the LLC for the first 3 months of the year AND the personal taxes for my ex-wife who gets 4 properties from the LLC.  So he will do this correctly for her and hopefully be able to tell me how to do it myself in TTX (if TTX even allows me to do this correctly - it appears there are some limitation in the program).

I just send him the guidance I received here and asked him to confirm if this is the correct way to handle it. Based on what you are saying the answer will be no. I'll wait and see.   

[Anonymous_]

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@Carl wrote:

....you'll want to print out the two 4562's for that property that print in landscape format....

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Those forms (the Form 4562 Depreciation and Amortization Reports) are basically exclusive to the personal editions of TurboTax. They do not appear in TurboTax Business.

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@Carl wrote:

....If there's any passive loss carry overs you'll also need to print the 8582 and keep it.

---

Partnerships do not file Form 8582.

[Erik1963]

Quick update. I discussed with my CPA and he told me how to do this. I do need to override the calculated annual depreciation, which it seems TTX does not allow me to do. Anyone has any guidance of how to manually override calculated annual depreciation? If it can't be done, I can't use TTX for my 2021 taxes and need to hire someone to do my taxes. 

[DianeW777]

Yes, you can override if you use TurboTax CD/Download.  The override can be accomplished on the Depreciation Worksheet in Forms mode.  You must select the field, then right click and select 'Override'.

Your assets and depreciation continue on as though nothing changed because they always belonged to you.  You will arrive at the correct overall depreciation for the year if you add your assets exactly as they were on the LLC, then adjusting the personal side to reflect the 75%,  Together with the LLC K-1 and your personal depreciation you will utilize 100% of what you are allowed for 2021.

This will allow you to change the current year depreciation and then in the future you should not have to override again.

Returns that contain overrides cannot be e-filed and may not be covered under our 100% Accurate Calculation Guarantee.

• How do I override an amount calculated by TurboTax?

• How to switch from TurboTax Online to TurboTax CD/Download?

@Erik1963

[Erik1963]

That is great news. I have the downloaded version. Does this behaves the same way as the CD version and allow me to do the override? 

[Anonymous_]

There is absolutely no difference in functionality between the CD and downloaded versions.