Rental Property Disposition

[bear27]

My mother had a rental property LLC.  She passed away at the end of March and the LLC was transferred.  In Turbo Tax there does not seem to be a way of disposing of the business without selling the property (which was not done). How do you terminate the rental property LLC without using the sell the property option?

[ColeenD3]

A single-member LLC is considered to be a disregarded entity by the IRS, meaning it has no real existence apart from the owner. You will need to close the LLC with the state.

[bear27]

Hi Coleen - Many thanks for your response.  I was a member of the LLC so it transferred to me.  I have set that up in my return as an inheritance.  In my mothers return I don't see a way to close it out the same way in TT.  Not sure if you are aware of the process to use.  Many thanks

[ColeenD3]

Were you filing a Partnership tax return? Two member LLCs default to a partnership.

[bear27]

Hi Coleen - The LLC was owned by my mother and managed by me so no partnership.  The LLC was structured to transition to me based on her passing away.  To be more specific was trying to make sure the depreciation was calculate correctly in her final return as it show full year vs partial.  In TT I don't see a way to show disposition of the LLC other then selling the properties.  Any idea?

[JillS56 · Accepted solution]

A single-member LLC upon the death of the sole member is dissolved. Whether or not the LLC survives depends on the actions of the heirs, successors, and assigns.   Even if the LLC is not mentioned in the will, the LLC will go into the estate of the deceased member and the interest will automatically pass to the heirs, successors, and assigns of the deceased member’s ownership unless prohibited in the operating agreement.  The heirs, successors, and assigns of the deceased member may elect to continue the LLC within 90 days of the sole member’s death unless the operating agreement prohibits the continuation of the LLC. 

With that said, since an LLC is considered a disregarded entity for tax purposes, you do not need to show a disposition of the LLC in the tax return.   The LLC is not being sold, it goes into the estate and is distributed through the estate. 

To complete your mother’s final return, you would report the income and expenses as you normally would for the beginning of the year until the date of death.   TurboTax will handle the correct calculation of depreciation.  The transfer of the LLC interest is handled through her estate.   

If you continued to handle the LLC business after your mother’s death and you inherited the interest of the LLC, then you would report the income and expenses on a Schedule C with a beginning date/start date of the date of death.  Any assets of the business you acquired would be valued at the FMV as of the date of her death.  

Here is an article from the Tax Advisor that talks about handling gifts and bequests of LLCs.   You will need to scroll down to the section on Bequests of LLC Interest.  Bequests of LLC Interest

[Carl]

To close the LLC as far as taxes are concerned, there are actions you must take. Now I'm not all that certain how it works in TurboTax Business with the 1065 partnership return.  But here's how it works on the personal return when reported on page 1 of the SCH E.

 - All business assets such as the rental property itself must be disposed of. You do this by working through each individual asset listed in the Business Assets section, one at a time.

 - On the screen "I stopped using this asset in 2021" select yes.

 - On the screen "Special Handling required?" select yes to indicate the property was removed for personal use. If you select no, then it's assumed you sold the property and are "forced" to enter sales information.

Take note that you should print out the two 4562's for that property which are in landscape format. There's two of them for that property. One is titled "Depreciation & Amortization Report" and the other is "Alternative Minimum Tax Depreciation".  You may (or may not) need the depreciation amounts for closing out the estate. I can't say for sure, because I know that the heirs inherit the property with a cost basis of it's FMV on the date of the original owner's passing, and the heirs do "NOT" have to deal with the depreciation taken prior to their passing. I think that gets dealt with either on the deceased final 1040 tax return, or the final 1041 estate return.

[bear27]

Wow that is what I call a comprehensive answer.  Very much appreciated for providing a detailed response.  You are awesome!!

[bear27]

Thanks Carl - I did check stopped using the property but neither personal use or sale seems to be correct.  Hence what prompted my question in the first place.

[PatriciaV]

@bear27

On your mother's final tax return, indicate that the LLC/Rental Property was sold or disposed of in the current tax year.

For each asset, indicate that it was sold, retired, etc., using the date of death as the retirement date.

On the Special Situations page, say "Yes," since the asset was gifted to you (through inheritance).

[Carl]

neither personal use or sale seems to be correct.

A screen or two after you indicate "I stopped using this asset in 2021" you'll be presented a "Special Handling Required?" screen. Read that screen so you'll understand why I'm telling you to click the "YES" button on that screen. Then click the YES button.

[bear27]

Hi Carl - There is no place (I can find) to say stop using.  I can click sold or disposed, but that leads me to update the depreciation section.  It also says if I check that box it is disposed of in a fully taxable transaction.  It does not meet that criteria.  Just to be clear I am entering all of this information on Schedule E

[Carl]

In the Assets/Depreciation section you have to work through each individual asset one at a time. Select the EDIT button next to an asset and work it through. 

[tagteam]

@bear27 

You are somehow missing the screen in the screenshot below.

[bear27]

Thanks for that.  Appreciated.