Rental Property to LLC

[Andy_221]

My business partner and I purchased a rental home together in 2018 in our names.  Now in 2019, we've deeded it over to the LLC we each own 50% of.  It looks like this should qualify as a Sec 721 transfer, so the basis, holding period, and everything should stay the same.

Do I need to call-out anywhere on our 1065 that this happened? Or do I just begin realizing the income and expense starting when we signed the deed over (Feb 15th, 2019)?

[Rick19744]

I have attached a link to a K-1.  You will note Part II questions M and N.

Both of these questions deal with the contribution of the property.

You need to answer "yes" to the question.

For question N you need to determine the FMV of the property at the date of contribution.  Compare this to your adjusted basis and the difference is your Section 704(c) built-in gain; or could be a loss.

While this does not impact you at this time, it will have significance should you bring in another partner or should one of you leave.

You need to track this built-in gain for the reasons noted above.

https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

[Andy_221]

Great, thank you.  

So I figure out the built-in gain of the property, and report it 50/50 on the K-1 for each parter.  Then I report the post-transfer income and expense on Form 8825 with 10.5 months of depreciation?

Will I have to report this transfer on my personal taxes? 

[Rick19744]

Correct.

Will I have to report this transfer on my personal taxes? 

The technically correct response is 'Yes".  The LLC should "technically" allocate a Section 704(c) allocation to each member.  Since it is just the two of you, and you both contributed the same percentage, the end result will be no different.

However, this will be an issue as noted previously if you should bring in another member of if one of you should leave.  If that occurs, you should consult with a tax professional to help with the mechanics of the allocation.

[Andy_221]

Is there a section of my 1040 that the allocation/contribution is reported on? Or is reporting it on the K-1 sufficient?

Also, the K-1 instructions say that I need to "attach a statement" showing information about the property, but I'm not seeing any more info on what exactly they're wanting.  A word document describing the property?

Really appreciate the help

[Rick19744]

The K-1 instructions that I provided a link to previously do provide guidance on what to include with the return and for the respective K-1.

However, dealing with Section 704(c) is not an easy area.

As stated previously, once you determine the amount of Section 704(c), this amount needs to be specifically allocated to the noncontributing members; yes, noncontributing members.  So in your case, each of you is the noncontributing member for the Section 704(c) of the other member.

The allocation needs to be handled through special allocations described in the regulations, which I won't get into, but they are known as traditional, traditional with curative or the remedial method.

I would recommend that you consult with a tax professional to get this set up so you can handle this on an annual basis along with the required information in item N of the K-1.

As you can see, even basic partnership tax issues are not for the feint of heart.