Step up in Basis

[Duane Anderson]

Father owned a business and the prior tax returns filed are 1065's....Father died and the son inherited the business (wife received the personal assets). Can the assets of the business (primarily rental properties) be stepped up? If so, does the depreciation taken on the cost basis of the assets stay in place ?

Thanks,,,Duane Anderson

[taxea]

depreciate the difference separately by subtracting the original basis and depreciation already taken from the stepped up basis

[Burke]

It seems to me that if the father owned the "business" (and the properties) outright, then they would receive stepped-up basis. However if that was the case, why was he filing a partnership return? Who was the other partner?

[Duane Anderson]

Reply re ownership

It seems to me that if the father owned the "business" (and the properties) outright, then they would receive stepped-up basis. However if that was the case, why was he filing a partnership return? Who was the other partner?

The Father took 100% of the profits and losses and several others were "gifted" small equity amounts over the years. And the Company owned three other company's that were included in the IRS Form 1065. Thanks,,,Duane Anderson

[Lion]

If 50% of the ownership of the partnership changes, the partnership must dissolve. Is it distributing the properties to the other partners? Selling off everything and distributing cash? Who now owns the properties being depreciated? Step through the dissolution.

[ATSMAN]

If 50% of the ownership of the partnership changes, the partnership must dissolve. Is it distributing the properties to the other partners? Selling off everything and distributing cash? Who now owns the properties being depreciated? Step through the dissolution.

I agree with Lion.

OP how many partners were there on the day before the father's death and what were their ownership?

I am still trying to understand what does "gifting" equity to others mean? These recipients get a K-1?

[Roland Slugg]

Duane, some parts of your posts make no sense to me ... maybe they do to others.

If the decedent was taking 100% of the profits, how was he doing that? With guaranteed payments? Even then it would be difficult to end a year with no gain or loss, but if there was a gain or loss, it would have been allocated among all the partners, not just to the father/decedent.

And what about the other three "company's?" (sic -- companies) the partnership owned. It's not clear how they fit in with everything else.

Getting back to your original Q, though, all the assets get a stepped-up basis to their FMV as of the date of the father's death, but only to the extent of the decedent's interest in each asset. The basis of the portion of each asset attributable to the other partners, including the assets allocable to other owners, if any, of those three other companies, does not change.

For the assets that do get a basis step-up, depreciation begins anew for each one (if it is depreciable), and the basis and accumulated depreciation allocable to the decedent is discontinued. There is no "dual" or "split" basis in a situation like this. The person who suggested it above was probably thinking of a like-kind exchange transaction which can result in a dual basis for the new asset and a continuation of the depreciation for the "old" (i.e. carryover) portion.

[Duane Anderson]

Additional info re Partnership

I agree with Lion.

OP how many partners were there on the day before the father's death and what were their ownership?

I am still trying to understand what does "gifting" equity to others mean? These recipients get a K-1?

The Father gets 100% of the profit and losses allocated to him. He owns 88%, son owns 5% and four others own 7%, at the date of death. Upon death the son gets the business assets and the wife the personal assets. The "gifting" of equity was started several years ago, when the market was booming, but with the housing collapse no gifting as been done in the last several years. Basically the Partnership who files IRS Form 1065 is a holding company...They own three other company's (one with 75 rental properties) and two invest in real estate loans, all of which have done poorly over the last several years.

So if the partnership has to dissolve how do we get the business assets to the son, since he wishes to run the business and should be successful as the markets return to some improvement. Thanks again,,,Duane Anderson

[Gretel]

So if the partnership has to dissolve how do we get the business assets to the son, since he wishes to run the business and should be successful as the markets return to some improvement. Thanks again,,,Duane Anderson

After you follow the rules for dissolution of the partnership you will know what son's basis is in % of son's assets. To the best of my knowledge, % of dad gets step up, and then he will buy out the other sons? If so, basis in assets will consists of three components.

[AZUKHiker]

Doesn't your client get 88% of the partnership

The way I read this the son has inherited the father's 88% interest in the partnership so will have a stepped up outside basis based on the value of that 88% to be added to the basis of his existing 5%. The four others still own 7%. So the partnership still exists albeit a new one for tax purposes.

If the son wants the whole business he will need to buy out the other four who own 7% unless there is something in the partnership agreement which specifically addresses what happens on the death of the majority owner i.e. they are forced to sell back to the partnership etc.

The Father gets 100% of the profit and losses allocated to him. He owns 88%, son owns 5% and four others own 7%, at the date of death. Upon death the son gets the business assets and the wife the personal assets. The "gifting" of equity was started several years ago, when the market was booming, but with the housing collapse no gifting as been done in the last several years. Basically the Partnership who files IRS Form 1065 is a holding company...They own three other company's (one with 75 rental properties) and two invest in real estate loans, all of which have done poorly over the last several years.

[Burke]

I agree. Of key importance here is the Partnership Agreement among the various owners. It should cover the requirements in the event of death of one of the partners.