contribution of rental property to LLC by husband/wife-built in gain?

[Casper]

Husband and wife owned a commercial rental property for several years, owned jointly as individuals.  For the purpose of legal protection only, the property was transferred to an LLC which is being reported as a partnership for tax purposes.  Husband and wife each have 50% interest in LLC and are reported as 50% each partners.  No other property contributed. No cash was contributed.  The mortgage was refinanced in the LLC name on the date of transfer and the old mortgage paid off.    No cash out to owners at refinance, but a portion of the new mortgage was loaned to a related LLC at loan closing as a simultaneous transaction by the lending bank.  Rental operations continued but in the name of the LLC and the only cash was generated from rental income after closing.

The transaction is recorded on the LLC books as:

debit:  original cost of real estate with original purchase date as placed in service date

debit:  note receivable for loan to related LLC (related by common ownership by one spouse)

debit:  deferred loan costs

credit:  accumulated depreciation at date of transfer

credit:  mortgage payable

credit:  partners' equity (50/50 each partner) to balance

The depreciable property is being depreciated as a continuation of the individuals' depreciation schedule.

The fair market value of the real estate at transfer was greater than the original cost of the property.

 

Is this the correct recording?  Is there any recording required for the market value of the property in excess of cost or basis on the date of transfer?

Form 1065 K-1 Item M asks: Did the partner contribute any property with built in gains?  Is this yes or no, since no gain was recognized on the transfer?

 

This transaction was in a prior year and the loan receivable has been paid in full and the mortgage has been paid in full, if this affects any feedback.

[DANRVAN]

On 8/25/2019 at 5:22 PM, Casper said:

Is this the correct recording?  Is there any recording required for the market value of the property in excess of cost or basis on the date of transfer?

IRS partnership rules say property and capital accounts are recorded at FMV.   However, the contributing partner has a basis in the partnership equal to his basis in the contributed asset,  that is also the basis of the asset in the hands of the partnership.

As a result, you have tax vs book differences that are accounted for under section 704(c) in order to allocate the built in gain to the contributing partner and depreciation to non contributing partner.

However, in your situation there is really no issue since both husband and wife made an equal contribution.  The classic 704(c) situation is where partner A contributes cash and partner B contributes appreciated or depreciated property.

By the way, welcome to the forum Casper.