How do I handle disposition of assets when transferring a commercial rental property from one related LLC to another (i.e., no sale price)?

[rjr2525]

We own a commerical rental property via a multi-member Kansas LLC, but will be transferring ownership of the property to a new multi-member Oklahoma LLC that has the exact same owners (i.e., no sale price) effective 12/31/2017.  Since the new Oklahoma LLC has a different EIN we will be filing a final 2017 tax return for the old Kansas LLC and next year a 2018 return for the new Oklahoma LLC.  Turbo Tax is prompting us to the disposition of the assests on the final Kansas LLC 2017 return, but our intial thought was to just take the final cost basis and transfer that to the starting cost basis for our new LLC.  Need help.  Your insight is greatly appreciated.  Thank you. 

[SweetieJean]

You are asking from TT SE  Partnerships need to file Form 1065, which requires TT Business.

[Rick19744]

Not sure why the change in LLC, but there are a number of issues that either do or could come into play here:

1. If the property was contributed by a member of the LLC this could complicate the issue.
2. Hopefully the ownership of the LLC is in the same proportion as the old LLC.
3. If the property was acquired by the LLC, then treat this as a liquidating distribution of the property to the member's.
4. While the new LLC will have the same owner's, and assuming no ownership change, you still need to indicate on the K-1 of the new LLC (once filed) that you contributed property where the adjusted basis is not equal to the FMV.  This is question M on the K-1.
5. Item 4 relates to what is known as Section 704(c).  While annual adjustments should be made, at the end of the day this will only come into play if one of the original member's leaves the LLC.  This can be a complicated area and I would recommend consulting with a tax professional that understands partnerships; not just simple partnerships, but ones that have complexity as Section 704(c) can be confusing.

[rjr2525]

Thank you so much for the prompt response, this was very helpful.

1.  The property will be contributed by all members of the existing LLC to the new LLC according to their ownership %'s in the existing LLC
2.  Yes every members ownership % will be the same in the new LLC
3.  O.k., I presume this will be shown in TurboTax under the "Partner/Member Info" as a property distribution by each member?  Does each member's distribution amount need to equal their % of the property's remaining cost basis at the end of the year (i.e., zero it out)?  Also, in this scenario we should not have to fill out the section in TurboTax under Property Dispositions, correct?
4.  Thank you, this is very helpful information.
5.  It is very unlikely any of the members will leave the LLC, so hopefully things can stay fairly simple for the near term.

Thanks again.  Merry Christmas!!

[Rick19744]

Since I use Mac, I do not have access to the TT Business since the software is windows only.  

Response 3) I would assume it would be under this section.  And "yes" it does need to be in accordance with each member's ownership.

As a follow-up to the distribution issue, technically your property could end up with a different basis than what is in the LLC.  This is due to the fact that when property is distributed in a liquidating distribution, it takes each member's basis in the LLC (your outside basis).  Once again, a complicated area.  You may want to get some professional tax advice.

Response 5) While there is no "near term" plan for a change, the commercial real property life is longer than near term so could come into play many years down the road.  The purpose behind Section 704(c) is to avoid shifting of any gain between members.