step-up

[imjulier]

Does rental/investment property that is inherited get the same step up in basis as stocks and persoanl residence? I believe it would but am I missing anything? By the way, I've been browsing the ATXers communities and people there can be mean....as if you might be an idiot for asking a legitimate question. I'm glad we have this forum.

Thanks,

Julie

[WmMorris]

Julie, I can't think of any reason it would be treated differently than anything else.

[Maribeth]

Does rental/investment property that is inherited get the same step up in basis as stocks and persoanl residence? I believe it would but am I missing anything? By the way, I've been browsing the ATXers communities and people there can be mean....as if you might be an idiot for asking a legitimate question. I'm glad we have this forum.

Yes, rental property gets the same step-up or step-down. Depreciation starts all over again.

Maribeth

[michaelmars]

There is a difference if the decedent owned the property or he owned a partnership share, owning the property. if he owned it as a partner then the partnership elects the step-up.

[grandmabee]

or DOWN with the way real estate is going now.

[Kea]

How does the partnership do the step-up? I'm sorry if that's a basic question as I haven't done any partnership returns before. My client just inherited a 50% share in a partnership. The other partner is the one who has been preparing the partnership return, but is not a tax preparer, and has always just stuck to the basics. I was thinking we would start the depreciation over on my client's personal return but had not yet found out how to do that. All assets had been previously fully depreciated. Does partnership start depreciation over again on inherited 1/2?

Thanks

[BulldogTom]

Thinking back to my partnership classes several years ago, I believe it is called a §754 election. I didn't do too well in my partnership class and it was a long time ago, so do some research on this.

Doesn't a partnership disolve when 50% of the partnership changes hands?

Tom

Lodi, CA

[Kea]

It was just treated as a name change. I did research that part for them at the time & it was pretty straightforward.

I just wish the person preparing the partnership returns was more knowledgeable about preparing partnership returns. I'm going to have other issues with this in future questions.

[BulldogTom]

I went back and took a look at §754 elections and it is coming back to me a little bit. What happens is the assets need to have two entries, one for the original partners and one for the stepped up partner.

Assuming the House and Land are the only assets, and the adjusted basis to the partnership before the transfer is 100K for the home and 100K for the land. If at the date of transfer, the FMV of the home is 150K and the land is 150K, then the new partner actually has a basis of 75K for the house and 75K for the land, while the other partners retain their basis of 50K house and 50K land.

The depreciation and gain or loss for the stepped up partner is then reported differently on the K-1. His depreciation is based on his adjusted basis of 75K, while the other partner's continue on with the current amounts.

Assume the home is sold for 300K. The gain for the stepped up partner would be 0 (50% of sales price = 150K less adjusted basis of 150K) while the other partners would have a gain of 50K (50% of sales price = 150K less 100K adjusted basis). That is how it would need to flow to the K-1.

Hope that helps a little. I think I have exhausted my knowledge (or lack of) on §754.

Tom

Lodi, CA

[OldJack]

Its actually a step-up in basis only to the individual's outside basis unless there is a §754 election. Without the election the individual has a different outside basis than inside basis making things a little difficult to keep straight.

[BulldogTom]

Good to see you back on the board OldJack. Is everything good with you and your family now?

Tom

Lodi, CA

[Kea]

If it is tracked as an outside basis, does the partnership make any changes to it's internal books or tax reporting? Does the step-up partner report it on their individual return? If so, where?

And, yes, OldJack, I agree with BulldogTom in hoping your family is safe and well, now.

Thanks!

[OldJack]

Thanks BulldogTom and Kea for your remarks. The man is out on bail currently in another state so my daughter and her family are trying to put their life back together. They have the constent concern that he will suddenly return before the trial, but they have to continue with school and work. I live in another town and feel save and am back to work with tax season.

An outside basis is just that. The partnership does not record anything, thus an outside tax basis. A simple outside tax basis example is that I purchase a partner's ownership direct from the partner for $10,000 when the partnership entity basis for that partner is only $1,000.

[michaelmars]

MANY Partnership agreements call for the partnership to book the step up, they make an election [atx has it in the elections] and then they just track the depr on the step up separately and only allocate it to the one partner on line 13w of the k-1. part of the step up is allocated to land and thus not depr'able.

dr building xxx,xxx

dr land xx,xxx

cr capital ptner Y xxx,xxx

[BulldogTom]

Mike,

I think they set it up as a separate Asset. You just add it as a new asset only allocated to the step up partner. It looks like Land - 754 PartnerX in the balance sheet. At least that is how I remember it when I was a young accountant and the company had a farming partnership that was passed from one generation to the next.

Tom

Lodi, CA

[Kea]

OldJack, I'm so glad everyone is relatively safe for now. I hope it stays that way.

OK, in my example, my client inherited 1/2 of a partnership (that started in the 70s). The partnership owns several assets (land, house, barn, vehicles and cattle). Since the person preparing the partnership return would know absolutely nothing about the §754 election, I would prefer to just handle depreciation on the client's 1040.

Client receives K-1 showing no depreciation since everything was already depreciated (or born there or land). Is there some place to add the outside depreciation to the Sch E or would it go somewhere else? Should I start a Sch F for the client's depreciation?

@imjulier -- I apologize if I stole your thread.

[OldJack]

I've never done it before, but I would think the deduction belongs on 1040 Sch-E, page 2. The next line after the partnership numbers. Thats the trouble with tax books, they tell you its deductible but never tell you how or where.

[Kea]

I do feel better knowing it's "not just me." When a real expert doesn't know the answer either, I don't feel as dumb. I guess I'll figure some place to put it.

[michaelmars]

OLD Jack is correct in the placement of the deduction, whether you claim it on the 1040 or it flows from the 1065. Yes, its a separately stated asset on the tax program so you can allocate the depr. And the partnership needs to receive a letter telling them of the amount of the step up.

[Kea]

I'm finally taking some time to work on this return again. I input the assets in the Asset Entry Worksheet. It gives me an option to carry to Sch E, but only to page 1 (where some royalties are reported). I don't see any option to attach them to Schedule E, page 2 with / under the info from the partnership K-1.

I'm assuming that when this does end up flowing to Schedule E, page 2, it will just be one total number and not a long list of assets. (Well, it gets long when you list 40 cows separately!)

Any suggestions?

Thanks

[michaelmars]

without having the program in front of me today, i think you can just create a second k-1 input and put your depr calc on the correct line [13w?] also, i know the partnerships need to file a signed election not sure about individual, electing 754

[Kea]

Thanks, I'll try that -- when I get back to my work computer.

Since I still can't link the depreciation directly to a K-1, I guess I'll let it sit there as "unclassified" and then link the total only to the K-1. That might work. I won't be able to give the K-1 and EIN, so it might just have to be paper filed. This is a big return, I pity the data entry person who has to tackle this one!!!

[Maribeth]

I'm finally taking some time to work on this return again. I input the assets in the Asset Entry Worksheet. It gives me an option to carry to Sch E, but only to page 1 (where some royalties are reported). I don't see any option to attach them to Schedule E, page 2 with / under the info from the partnership K-1.

I'm assuming that when this does end up flowing to Schedule E, page 2, it will just be one total number and not a long list of assets. (Well, it gets long when you list 40 cows separately!)

Any suggestions?

Thanks

Enter it on the Schedule K-1 input sheet for 1065's. Show it as a separate "partnership", use the partnership's EIN and use the code section and depreciation as your name.

I do not know if you can keep track of the depreciation in ATX using the asset manager and coding the asset as unassigned. You might have to keep a separate workpaper to keep track of the depreciation.

Maribeth

[BulldogTom]

This has been a really good thread. I appreciate getting to "talk around the virtual water cooler" with all of you on a topic like this. When everyone adds a little bit of what we know (or don't know) it leads to some great discussions.

Tom

Lodi, CA

[Kea]

The only entry on this K-1 is the depreciation -- right?

I agree about tracking it separately. I'm using TRX, so I don't know what software I'll get next year for my $300. I'm sure the "unassigned" will not convert correctly.

I should know this part -- but the partnership sold a bull in 2009. If I list all assets and stepped up basis as of DOD, what do I do about the sale? It's not a normal sale to my client since the sale is already reported on the partnership. Do I just recalculate the sale price to account for the difference between the gain to the partnership and the (smaller) gain to my client?

OK, I have to stop asking the questions I can already answer (just thinking "out loud") and get back to work.

I agree BulldogTom, I appreciate our virtual water cooler, too.

Thanks!