1065 Liability Relief

[Gretel]

This is my first 1065 with liability relief.

Where exactly does this get reported on the basis worksheet? Two partners 50/50 (Couple) who own rental property formed LLC. Each one gets relief of 50% of mortgage but each one also gets 50% of assumed liability as basis.

Basis for liablibity shows as beginning basis and would make the adjustment for liablity relief as "other adjustments". Is this correct?

[Bees Knees]

LLC members do not get basis for liabilities unless they personally guarantee the loan. Is each personally liable for the loan, or just the LLC?

[Gretel]

The loan papers were signed before they became a LLC, so, yes each person is liable for the loan.

This brings up that they probably didn't transfer title to LLC (another subject).

If I don't make a manual adjustment on the basis statement it shows the wrong basis.

[Bees Knees]

You can't have liability relief unless you have liability relief.

If someone contributes property with a liability to a general partnership, there is liability relief in the sense that now you have other partners who take on a percentage of the liabilities. The other partner's basis is increased by the liabilities they assume, and the contributing partner's basis is decreased by the liabilities the other partners have assumed.

The problem with an LLC is the partners (or members) are not liable for partnership debt. Thus, when someone contributes property with a liability to an LLC, the other members do not take on any extra liability, and thus don't get a basis increase. If the contributing partner is still on the hook for the entire debt because the bank won't allow any transfer of that partner's liability to the LLC, then the contributing partner has no liability relief and so nothing changes (from a basis standpoint).

[Gretel]

Doing! Doing! I am more awake now.

Thanks Bees!