Estate transfers rental Property to LLC

[Max W]

An estate created  about 2 years ago recently transferred rental property to an LLC.

At the time, the appraisal was $1M.  In the two years, property in that area has appreciated 15%.

Are we looking at LTCG of $150?  

[SaraEA]

The LLC gets the estate's basis (FMV on date of death plus the costs of any improvements the estate paid for).  No cap gains until the property is sold.  I'm assuming the estate is not the principal of the LLC.  IRS has issues with estates that remain open longer than two years.

[Max W]

15 hours ago, SaraEA said:

The LLC gets the estate's basis (FMV on date of death plus the costs of any improvements the estate paid for).  No cap gains until the property is sold.  I'm assuming the estate is not the principal of the LLC.  IRS has issues with estates that remain open longer than two years.

Sara, thanks for your help.

Should the estate return have to show disposition of the rental property on form 4797?

And what about the deprecation accrued during the two years?

[SaraEA]

The distribution of property does not affect the 1041.  It's an accounting matter, while the 1041 covers income and expenses, not assets.  The LLC will receive the original basis from the estate + any improvements the estate paid for - depreciation.

[Max W]

16 hours ago, SaraEA said:

The distribution of property does not affect the 1041.  It's an accounting matter, while the 1041 covers income and expenses, not assets.  The LLC will receive the original basis from the estate + any improvements the estate paid for - depreciation.

So, for example ; property basis = $1M; imrovements $200K; depreciation $100K.  Basis to LLC would be $1.1M?

[jklcpa]

On 9/28/2018 at 12:01 PM, Max W said:

And what about the depreciation accrued during the two years?

If the property was owned by the decedent and transferred in to the estate, the basis in the estate is its stepped up/down basis. Once the property is in the estate, the basis of any additional improvements would be capitalized cost.  Once in the estate, depreciation should have started over using appropriate methods and lives in effect at DOD.

 

On 9/28/2018 at 12:01 PM, Max W said:

Should the estate return have to show disposition of the rental property on form 4797?

On the estate records, I would just take it out of service on the date it is transferred to the LLC.  Make sure the depreciation is calculated correctly through this date. This is not a short period year due to disposition.  It is a full year of depreciation that is allocated and split between the estate and LLC for the portion of calendar year each entity held the assets. 

 

24 minutes ago, Max W said:

So, for example ; property basis = $1M; imrovements $200K; depreciation $100K.  Basis to LLC would be $1.1M?

 

Each component and the land would be transferred out, and the LLC uses the same basis as the estate: see above - stepped up/down, or cost if added by the estate after death.  The LLC's depreciation schedule is a continuation of that from the estate and will transfer in the depreciable basis and accumulated depreciation at the date of transfer. 

 

[Max W]

That is a great help.

There is one other detail that I just uncovered.  The decedent left debts that were paid out of the rental income. Are those payments rental expenses (SchE), or 1041 expenses; or are they even deductible?

Thanks to you and Sara for all of your help.

 

[jklcpa]

58 minutes ago, Max W said:

There is one other detail that I just uncovered.  The decedent left debts that were paid out of the rental income. Are those payments rental expenses (SchE), or 1041 expenses; or are they even deductible?

Paying down debt in itself doesn't create a deduction. If it is a mortgage on the rental, then the interest portion would be reported on Sch E, otherwise any expense would have been when the charge was incurred, and may or may not have created a deductible expense on the Sch E or the 1041 itself.  Follow the same rules you would for a 1040 Sch E to determine if and when an expense is appropriately classified as a rental or other administrative-type expense.