Two brothers, A and B, live in a community property state. The brothers jointly own a commercial building they collect rent on which has been fully depreciated. Brother B's wife dies and the commercial property is appraised at $800K, meaning his stepped-up basis in the property is now $400K. Do I handle this as follows? 1) Add the new basis as a separate item on the fixed asset worksheet. 2) Manually adjust the K-1 entries so that only B gets the depreciation deduction for the building portion of the new basis. 3) Increase B's basis on the capital account and basis summary of the K-1. Thank you in advance for any insight you can provide.
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Do the brothers each individually own 50% of the property, or does the Partnership itself own it? -
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Check tax assessment or billings for real estate tax to see how it is titled.Comment
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Building is titled to both brother's living trusts, which include each's respective spouse.Originally posted by Burke View PostComment
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I'll start off with the disclaimer that I don't do Partnership returns, so I could be completely wrong here ...
Is there ANY evidence the property was contributed to the Partnership? If not, it doesn't belong on a Partnership return. Each brother should be reporting their portion on their individual Schedule Es.
"Mere co-ownership of property that is maintained and leased or rented is not a partnership."
In the event it was truly 'contributed' to the Partnership, then the property would not get a step-up in Basis, but the Partner's interest in the Partnership would get a Step-up in Basis.Comment
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Which means the partnership itself does not own the property. Was there a formal partnership established with an operating agreement? Apparently a partnership return has been filed in the past for this venture based on the information in the post. I agree with TaxGuyBill that it does not belong on a partnership return. A revocable living trust would be disregarded as a filing entity.Originally posted by mbigelow View PostComment
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Operating agreement exists but...
Property was never deeded to the partnership itself (I took over this tax return and can see I should have asked this specific question- lesson learned!). I don't think this changes income/loss calculations, they've just been reported on a K-1 and should have gone on a Sch. E. Still wondering where the step-up basis is applied- to both parties or just the one whose wife died?Originally posted by Burke View PostComment
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Just the one party.
However, it is still a bit unclear what to do.
It might be possible that a "capital contribution" (and/or the subsequent treatment of it being reported on a 1065) would have made the Partnership own it for income tax purposes. You and/or the taxpayer may need to research if that could be case, and/or consult a Real Estate Attorney. *IF* that is the case, it would be the taxpayer's Partnership INTEREST that gets the step-up in Basis, not the property itself.
If that is not the case, then it can't really go on the Partnership return, as the Partnership does not own it. You would need to start doing it correctly now, and have each file their portion on page 1 of their Schedule Es. The one taxpayer would use the Step-up Basis for depreciation. If both parties are agreeable to it (and want to ignore the potential legal complication that the Partnership now owns it), this is what should be done.Comment
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