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ILLMAS

Surviving spouse step-up

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Since ILLMAS may not be on again before answers are posted, I'm going to share more relevant facts about his client's situation that were provided to me. 

  • Husband died in 2019.  
  • A revocable trust may be involved.
  • In 2013, several rental properties were put into a H-W LLC.  LLC has filed as a partnership since its formation.
  • Properties in the LLC have very low adjusted basis. One appraised for ~ $700K and sold for $765K in 2019 after husband's death.
  • As far as I know, husband, wife, and properties are all in Illinois, not a community property state.


Questions are: 

  • the amount of step-up
  • where, and at what basis, is the sale of the one rental reported
  • how to deal with the LLC and the other remaining rentals in its name, and how are those are moved back to Sch E  

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4 hours ago, jklcpa said:

Questions are: 

  • the amount of step-up
  • where, and at what basis, is the sale of the one rental reported
  • how to deal with the LLC and the other remaining rentals in its name, and how are those are moved back to Sch E  

The answers are:

- it depends

- it depends

- it depends!

How was the rental titled on the deed?

Who originally acquired it and where did the source of funds come from to acquire it?

Was an asset inventory prepared by estate attorney showing joint vs separate ownership?

 

 

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10 minutes ago, DANRVAN said:

The answers are:

- it depends

- it depends

- it depends!

How was the rental titled on the deed?

Who originally acquired it and where did the source of funds come from to acquire it?

Was an asset inventory prepared by estate attorney showing joint vs separate ownership?

 

 

How was the rental titled on the deed?  The title for all the rental properties was changed to the respective LLC.

Who originally acquired it and where did the source of funds come from to acquire it?  Husband and wife in the late 70's, joint monies.

Was an asset inventory prepared by estate attorney showing joint vs separate ownership?  Not exactly as inventory, but the estate/will documents mention the properties and who is entitled to them:  1st is the surviving spouse, 2nd is the children, 3rd is the grand-kids etc....

Thanks

MAS

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30 minutes ago, ILLMAS said:

How was the rental titled on the deed?  The title for all the rental properties was changed to the respective LLC.

Who originally acquired it and where did the source of funds come from to acquire it?  Husband and wife in the late 70's, joint monies.

Clearly not a 100% step up in basis since the property was acquired with joint funds.

What is not clear is the ownership at date of sale.  Partnership will terminate on date of death, unless his share held by estate until distributed to wife, then maybe 1/2 sale reported by wife and 1/2 to estate.  Otherwise report as sold entirely by wife.  However it is done, the total gain will end up reported by surviving spouse recognizing 1/2 stepped up basis, so the result should be the same.

After termination of partnership,  wife will report income on schedule E.  Depreciation will have two components: 1/2 original basis and 1/2 step up basis.

Assuming a Credit Shelter Trust was not involved.

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57 minutes ago, DANRVAN said:

Clearly not a 100% step up in basis since the property was acquired with joint funds.

What is not clear is the ownership at date of sale.  Partnership will terminate on date of death, unless his share held by estate until distributed to wife, then maybe 1/2 sale reported by wife and 1/2 to estate.  Otherwise report as sold entirely by wife.  However it is done, the total gain will end up reported by surviving spouse recognizing 1/2 stepped up basis, so the result should be the same.

After termination of partnership,  wife will report income on schedule E.  Depreciation will have two components: 1/2 original basis and 1/2 step up basis.

Assuming a Credit Shelter Trust was not involved.

Clearly not a 100% step up in basis since the property was acquired with joint funds.  I sent you a PM for this one.

What is not clear is the ownership at date of sale. The property was sold 8 months after passing of the spouse.   Partnership will terminate on date of death (agree, March 2019), unless his share held by estate until distributed to wife, then maybe 1/2 sale reported by wife and 1/2 to estate.  Otherwise report as sold entirely by wife.  However it is done, the total gain will end up reported by surviving spouse recognizing 1/2 stepped up basis, so the result should be the same.  Since the sale happened after the partnership terminated, the sale will be reported on the 1040 correct?

After termination of partnership,  wife will report income on schedule E.  Depreciation will have two components: 1/2 original basis and 1/2 step up basis. (Agree if 100% is not available)

Assuming a Credit Shelter Trust was not involved.

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3 hours ago, ILLMAS said:

Clearly not a 100% step up in basis since the property was acquired with joint funds.  I sent you a PM for this one.

You might have a case if the jointly owned property was acquired before Jan 1 1977  (re tax reform act of 1976) and you can establish that the property was purchased entirely with funds provided by deceased spouse.  There have been several court cases to support that position, including Hahn v Com.

The fractional interest rule comes into play after 1976, so jointly owned property acquired after that date would not qualify for 100% step up regardless of which spouse provided the funds.

 

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3 hours ago, ILLMAS said:

  Since the sale happened after the partnership terminated, the sale will be reported on the 1040 correct?

agree

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5 hours ago, ILLMAS said:

Was an asset inventory prepared by estate attorney showing joint vs separate ownership?  Not exactly as inventory,

In Oregon we have a low inheritance tax exclusion so it is not uncommon to prepare an inventory of estate assets; also used in probate.  

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