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My wife owned a rental lakeside cottage that was turned into an LLC to protect us against renters suing us (as an added precaution we also had a ballon policy). So the LLC owns the cottage and my wife owned the LLC. She gifted this LLC to the youngest son who is thinking of selling it for retirement purposes. He lives about 600 mi. from the LLC. There are several questions about this:

What is his basis? Is it the appraised value at the time of the gifting?

Is there any reason he should keep the LLC a year for the sake of capital gains. The appraiser said that his appraisal price was probably a minimum value so there might be some capital gains.

Is there any benefit from dissolving the LLC somehow and selling the property as a piece of private property.

Should he get the aid of a local tax lawyer or tax CPA (I presume it should be local) to help him with this sale? Or would a local real estate broker do?

brucedoe
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Should he get the aid of a local tax lawyer or tax CPA (I presume it should be local) to help him with this sale? Or would a local real estate broker do?

Step one would be your wife hiring someone to explain things to her, including the effect of the gift. She no doubt skipped filing a gift tax return. That advisor also could explain to her (she could pass it along to your son) what "disregarded entity" means with respect to taxes and LLC's.

What a mess!

Phil
Rule Your Retirement Home Fool
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Marti

No, a form 709 was filed with the IRS for tax year 2012 which also contained a gift of our former home to the oldest son. The two appraisals (home and LLC) totaled less than $1 million. The gift was made on December 28, 2012. This was handled by a lawyer, local to us (and 250 mi. from the LLC). Incidentally the appraisal of the cottage was a paid appraisal by an appraiser who said that so little lake front property is being sold that it was difficult to make an appraisal.

So far as I know, all this gifting was done legally. At least the lawyer has done a lot of this sort of thing for "old folks."

I have Googled "disregarded entity" and as nearly as I can tell the LLC is one (though I found the language confusing). However, taxes were filed on schedule E and not C. At least taxes were paid and the government was not cheated.

Is it still a mess?

brucedoe
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I don't think you have a mess, based on the additional information as to the gift tax being done for the transaction.

Your son's basis is the lower of:
*your wife's basis
*the value at the time of the gift.

So for 2013, as long as your son is the sole member of the LLC, it is still a disregarded entity, and it's his responsibility to report the income/expenses (if any) on his Schedule E. (And yes, that is the right form.)

And I don't see why he'd want to, or need to, dissolve the LLC now. If he chooses to sell the property, let the LLC be the seller. Dissolving it now would just require an additional deed to be filed, and maybe transfer tax, depending on state/local laws. And then dissolve it later. He might also have some protection for environmental issues, but that's a question for his lawyer.

Bill
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Is it still a mess?

Nope. Like Bill said.

Phil
Rule Your Retirement Home Fool
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A little expansion on Bill's discussion of basis:

Your son's basis is the lower of:
*your wife's basis
*the value at the time of the gift.


Since we're talking about a rental it's important to mention that your wife's basis is her adjusted basis net of depreciation. Depending on how long she owned and rented it (the transfer to the LLC is irrelevant) her adjusted basis could be just the undepreciated value of the land.

Gifted property carries two bases if the FMV at the time of transfer is less than the adjusted basis (not likely in your case). If the property is sold for more than the adjusted basis, gain is computed normally. If it's sold for less than the FMV at the time of transfer that value is the starting point for figuring the loss. Anything in between results in a zero gain/loss.

See Pubs 550 and 551.

Phil
Rule Your Retirement Home Fool
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With the added clarification that the gifts were handled quite correctly, let's get back to your questions.

What is his basis? Is it the appraised value at the time of the gifting?

He may have two different basis numbers.

For calculating a gain, his basis (and holding period) carried over from your wife's ownership. So her basis became his basis - including any depreciation taken on the property over the years. (So be sure to give him your depreciation schedule from your tax return.)

For calculating a loss, his basis is the lower of the above number or the appraised value on the date of the gift.

The bottom line here is that any gain since your wife purchased the property will be taxed to your son, but any loss since her purchase is hers, and will effectively be lost and benefit no one.

Is there any reason he should keep the LLC a year for the sake of capital gains.

No. His holding period includes the time your wife held the property. Assuming she owned the property for at least a year, it's already long-term in his hands.

Is there any benefit from dissolving the LLC somehow and selling the property as a piece of private property.

That's going to depend on the buyer.

You - or really your son - has to keep some things separate. He now owns an LLC, and that LLC owns a piece of real estate. He can sell the LLC, or the LLC can sell the real estate. Either one of these has the effect of transferring the property to the buyer. He could also dissolve the LLC, transfer the property to himself directly, and then sell the property. Frankly, I'd avoid the last one, as it involves the extra step - and expense - of transferring the property to himself just before he sells it. There's really no need for him to do that, when the LLC can just sell the property directly.

If the buyer needs financing, their lender will almost certainly want the buyer to own the property itself rather than the LLC. While you could still sell the LLC in that situation, it could make things messy. And messy is generally expensive.

(Off hand, I'd guess that you'd have to set up two settlements - one sale of the LLC to the buyer and a separate financing settlement, where the buyer transfers the property from the LLC to himself, obtains the loan money, and then sends the loan money to the other settlement transferring the LLC from your son to the buyer. These would need to close simultaneously. That would leave the buyer with an empty shell LLC and direct ownership of the property. He'd probably then transfer the property back to the LLC.)

One advantage of selling the LLC rather than the property is privacy. The transfer of the LLC is not something that would have to be recorded in the county records.

On the other hand, selling the property itself is fairly straightforward. It's just the LLC that would be selling and not your son. After the sale, your son would be left with an empty shell LLC and would probably want to dissolve it.

Should he get the aid of a local tax lawyer or tax CPA (I presume it should be local) to help him with this sale? Or would a local real estate broker do?

He probably needs all three.

The real estate broker would handle the marketing and sale of the property. He'd want a lawyer to advise on the sale of the property (if that is customary in your area), and to handle the transfer or dissolution of the LLC. Finally, the tax professional would advise on the tax implications of the transaction and prepare his tax return for this year.

The real estate agent should be local to the property. The lawyer should be in the same state as the property, or be licensed to practice in that state. The tax professional can be anywhere, but generally local to your son is the most convenient.

--Peter
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Thanks to WRadical and Marti for helpfully responding to my quandary. I hope no one would be hurt if I give extra thanks to Peter for his extended reply.

I was afraid that the basis would be as ya'll say as the appraised value at the time of the gift would be too simple.

A complication is that my wife acquired the property with her sister. This wasn't working out so my wife bought out her sister. I think this means there are two bases: 1/2 the property based on my wife's acquisition cost and 1/2 on the price she paid her sister.

As the acquisition was made 30 yrs ago, I presume (for now) that her share of the structure was depreciated away long ago, but the sister's half probably has something left. As to the property value, I would guess the appreciation since the acquisition by my wife is something like 9X (off the top of my head). And 3X the price paid to the sister (which I remember).

Yes, I can easily come up with the depreciation schedule.

brucedoe
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A complication is that my wife acquired the property with her sister. This wasn't working out so my wife bought out her sister. I think this means there are two bases: 1/2 the property based on my wife's acquisition cost and 1/2 on the price she paid her sister.

Yep. That's correct.

As the acquisition was made 30 yrs ago, I presume (for now) that her share of the structure was depreciated away long ago, but the sister's half probably has something left.

Probably correct.

30 years ago was 1983. That's back in ACRS depreciation territory, and the longest life for rental real estate under ACRS was 19 years. (There's some at 15 years, some at 18, and some at 19. I don't remember the exact cutoff dates for each one, but it doesn't really matter as they're all going to be fully depreciated by now.)

MACRS started in 1987, and I would guess your wife bought out her sister some time after then based on your guesses of appreciation since the purchase. That depreciation would be on a 27.5 year life, so there should be some depreciation left.

--Peter
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Peter

Thanks again.

brucedoe
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