LLC question

[natiro]

Sorry, I'm completely brain dead and can't quite get through all the reference materials I have for this!

New LLC is formed. Members (married couple) contribute a building with FMV of 780,000 and basis of 500,000. There is a loan on the property of 100,000. Third member contributes cash of 680,000. Spouses are each 25% members and third party is 50% member.

How is this reported on the tax return balance sheet? (Building at 780,000 or at 500,000?)

Also, let's say depreciation is 12,800 (500,000 basis over 39 years, with rounding). How is the depreciation allocated? I'm thinking that it gets allocated to the third party until capital accounts are equal.

Am I on the right track?

I appreciate your help. Thanks.

[OldJack]

One way to recorded is using accounts with names such as:

$500,000 debit - Building Cost Basis (for depreciation)
$ 12,800 credit - Accumulated Depreciation-Building Cost Basis
$280,000 debit - Building Appreciation (never depreciated)
$100,000 credit - Mortgage Loan Assumed
$340,000 credit - Member 1 Equity
$340,000 credit - Member 2 Equity

$680,000 debit - Cash
$680,000 credit - Member 3 Equity

$ 12,800 debit - Depreciation Expense (not allocated to any specific member)

[Matt Sova]

Entry

Dr 680,000 Cash
Dr 500,000 Original bldg basis
Dr 292,800 Building basis not depreciated (to get bldg to FMV not part of ptnrship's basis)
Cr 12,800 Accum Depr Bldg
Cr 100,000 Mortgage
Cr 340,000 Husband Equity
Cr 340,000 Wife Equity
Cr 680,000 Member 3 Equity

You will have to track this for the built in gain on H&W under IRC 704(c). H&W have a built in gain of $292,800. If the partnership later sells the property for a gain, the first $292,800 is allocated to H&W.

[natiro]

Old Jack and Matt

Thank you both for your clear replies. Matt, I don't think my original response was clear about the depreciation. My intention was to ask about the depreciation that happens after the property is contributed to the LLC. Give this, I believe your balance sheet would be the same as Old Jack's.

I understand about the built in gain that would have to be allocated to husband and wife. Thanks for mentioning that point.

Regarding the depreciation though, I keep reading, (but maybe not quite understanding!) that tax depreciation would be allocated in an amount equal to FMV depreciation to the member who contributed the cash, and the balance would be allocated to the member who has a book/tax difference (IRC 704(c))

In this case full year depreciation on 780,000 (assuming no land) would be 20,000 (39 years). Depreciation on the 500,000 basis is 12,800 (rounded). My interpretation is that the "cash" partner would be allocated 10,000 and H & W would be allocated 2,800 (total). The 10,000 is 50% of the FMV depreciation. The 2,800 is the difference between total tax depreciation and the amount allocated to "cash" partner.

Am I on the right track? I'd like to believe that if I studied this in May I'd get it immediately. But at the moment, I'm not so sure! Anyway, thanks for taking the time to answer.