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Subject Author Date
Rental property partnership buy out MDinDestin 02-18-2007
Posted by MDinDestin on February 18, 2007, 9:51 pm
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 For several years, I owned a 50% interest in a rental
property. Last April I purchased my partner's interest and
now fully own the property.

I'm not sure how to report the depreciation for 2006 and
beyond. I could carry on with the old depreciation for the
50% interest as I always did. Then, I could calculate the
new 50% interest I just bought seperately.

Is this correct?

Thanks,

MD

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Posted by Kreig Mitchell on February 25, 2007, 5:00 am
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> For several years, I owned a 50% interest in a rental
> property. Last April I purchased my partner's interest and
> now fully own the property.
>
> I'm not sure how to report the depreciation for 2006 and
> beyond. I could carry on with the old depreciation for the
> 50% interest as I always did. Then, I could calculate the
> new 50% interest I just bought seperately.
>
> Is this correct?

You need to talk to a tax attorney. There are two ways to
close out the partnership books. You may end up using the
proration method. You will also need to consider the tax
rules in light of your partnership agreement (or articles of
organization if a LLC). You might also be able to go back
and structure it as an installment sale (Section 453) or
redemption (Section 736) -- which might be more advantageous
to you.

Kreig Mitchell
www.irstaxtrouble.com
www.irstaxtrouble.com/blog.htm

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Mark Bole on March 3, 2007, 5:27 am
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Kreig Mitchell wrote:

>> For several years, I owned a 50% interest in a rental
>> property. Last April I purchased my partner's interest and
>> now fully own the property.
>>
>> I'm not sure how to report the depreciation for 2006 and
>> beyond. I could carry on with the old depreciation for the
>> 50% interest as I always did. Then, I could calculate the
>> new 50% interest I just bought seperately.
>>
>> Is this correct?

> You need to talk to a tax attorney. There are two ways to
> close out the partnership books. You may end up using the
> proration method. You will also need to consider the tax
> rules in light of your partnership agreement (or articles of
> organization if a LLC). You might also be able to go back
> and structure it as an installment sale (Section 453) or
> redemption (Section 736) -- which might be more advantageous
> to you.

Co-owners of rental property as described by the OP are not
partners for tax purposes, they can each report their own
share of the rental on individual Schedule E.

Since the seller of one-half of the rental property
undoubtedly reported their capital gain and unrecaptured
section 1250 gain, I suggest the new 50% of the property be
separately depreciated as if it were a separate property,
just as the OP proposed.

-Mark Bole

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Shyster1040 on March 4, 2007, 9:09 pm
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Whether or not a partnership existed for federal tax
purposes, the result is likely to be the same, namely, the
OP will be treated as having purchased his associate's 50%
interest in April of 2006. As a result, the OP should treat
the 50% interest he acquired from his associate as a new
item of real property placed in service in April 2006, and
amortize his cost for that 50% accordingly. With respect to
the 50% interest that the OP has always owned, he would
continue depreciating that on the old method used prior to
April 2006.

The reason for this are as follows:

If there was no partnership, then there was a "mere
co-ownership" under Treas. Reg. 301.7701-1(a)(2), and the OP
and his associate would have taken their own items of
expense and deduction into account separately, and could
have elected different depreciation methods. Upon sale of
the 50% interest by the associate to the OP, the OP would
have in fact acquired a new asset, the 50% interest
purchased, which would have been first placed in service by
the OP in April 2006, depreciation would be calculated based
on the purchase price as of April 2006, as would any
amortization.

On the other hand, if a partnership existed, the termination
of the associate's interest would have terminated that
partnership. As a result, under McCaulsen v. CIR, 45 TC 588
(1966) the partnership would be deemed to have distributed
the real property to the two partners in liquidation, and
the OP would then be deemed to have purchased the 50%
undivided interest distributed to his associate. This
result would be deemed to have occurred regardless of
whether the OP purchased the LLC/partnership interests of
his associate, or else purchased the 50% interest from the
partnership, which then liquidated and distributed the cash
to the associate and the remaining 50% interest to the OP.

As to the other 50% interest, since the OP would have
received that from the partnership as a liquidating
distribution, the OP would generally continue to depreciate
that interest on the same schedule as formerly; however, if
the OP's outside basis were less than the inside basis of
the real property, then the depreciation deduction amount
would be reduced to take into account the fact that the OP
would have received the interest with a transferred basis
that was lower than the basis being depreciated by the
partnership.

having acquired his associate's 50% interest by purchase in
April 2006, and would start a new holding period and a new
depreciation and amortization schedule in April 2006 for the
50% interest the OP acquired from his associate.

Thus, unless the OP and his associate engaged in some funky
financing arrangements, the OP's original 50% interest would
continue to be depreciated on the old schedule, and the 50%
interest he acquired from his associate would be depreciated
as a newly acquired asset first placed in service by the OP
in April 2006, using the purchase price as the basis to be
depreciated.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by MDinDestin on March 23, 2007, 6:12 am
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> Kreig Mitchell wrote:

>>> For several years, I owned a 50% interest in a rental
>>> property. Last April I purchased my partner's interest and
>>> now fully own the property.
>>>
>>> I'm not sure how to report the depreciation for 2006 and
>>> beyond. I could carry on with the old depreciation for the
>>> 50% interest as I always did. Then, I could calculate the
>>> new 50% interest I just bought seperately.
>>>
>>> Is this correct?

>> You need to talk to a tax attorney. There are two ways to
>> close out the partnership books. You may end up using the
>> proration method. You will also need to consider the tax
>> rules in light of your partnership agreement (or articles of
>> organization if a LLC). You might also be able to go back
>> and structure it as an installment sale (Section 453) or
>> redemption (Section 736) -- which might be more advantageous
>> to you.

> Co-owners of rental property as described by the OP are not
> partners for tax purposes, they can each report their own
> share of the rental on individual Schedule E.
>
> Since the seller of one-half of the rental property
> undoubtedly reported their capital gain and unrecaptured
> section 1250 gain, I suggest the new 50% of the property be
> separately depreciated as if it were a separate property,
> just as the OP proposed.

I appreciate everyone's comments. Your post reminds me of
when I was a very young, very green investor. I went to a
very expensive CPA and he had me doing partnership forms and
other things that were totally unnecessary. I wasted a lot
of money with this clown before I got wise.

That and a bad appraisal one time made me realize if I want
it done right, I'll either do it myself or educate myself
enough to tell crap from shinola.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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