Schedule E - property information problem / challenge

[aysoref]

Two rental properties we own for a couple years were listed correctly on our 1040 schedule E. This year we contributed them as member capital to a newly formed LLC partnership.

CPA advice: cannot just delete the properties from our 1040 schedule E. Instead, have to explain to IRS what happened. To do that, the CPA advises leaving them on schedule E, clear all income, expenses and depreciation lines, but add notes to each property description, something like "Property contributed to partnership  EIN xx-yyyyyy".  IRS will have that partnership's 1065, and will see the properties' info continuing there.

The properties are listed / identified on schedule E part I, line 1a. Only physical addresses show up there.

Technical problem: no matter what I tried, Turbotax does not let me append a note to a physical address on that line. It insists on only legit physical addresses. Options:

1) Forget electronic filing. Leave schedule E as Turbotax creates it. Manually add the recommended notes on the printed schedule E page. File by mail.

2) Leave schedule E as Turbotax creates it. Add a separate statement explaining the situation.

Question here: how do I add an explanatory statement to schedule E in Turbotax (similar to the statement I can add to form 2210) ? Or do I have to just add a separate printed page and file by mail ? 

3) Is there a better way to implement the CPA recommendation in Turbotax?

4) Is there a better or simpler way to deal with this case?

[Mike9241]

create a separate statement and attach it to your return that must be filed by mail. Turbotax can't handle non-standard statements. I can't say whether or not the IRS will read the statement. 

your alternatives

1) is to skip the disclosure to enable e-file and then respond to any IRS notice.

2) on the location line leave the number and street. Follow with "transferred to LLC partnership"

used the city line for the portion that won't fit on the location line

for example: location line  281 apple transferred to

city line  LLC partnership

note state and zip required so this is not perfect 

on schedule E it will appear as follows (il state 60006 zip code)

281 apple transferred to, LLC partnership, IL 60006

*************************************************

To transfer rental property to a partnership, you need to file a statement with the partnership return for the tax year during which the distribution or transfer occurs. The statement must include the name and address of the partnership, and a declaration that the partnership elects under IRC Section 754 to apply the provisions of IRC Sections 734(b) and 743(b)

[Critter-3]

In the TT program, in the asset section, you will indicate these were converted to personal use to stop the depreciation.   Then you will have the info needed for the cost basis you transferred to the partnership. 

If you are working with a professional you may want to use them for the personal return this year so the required statements are filed properly ... professionals can attach statements to efiled returns. 

[aysoref]

@Mike9241 thanks for the advice.

Option 1) I'd rather avoid. Option 2) seems more reasonable.

About IRC Section 754... Wife and I own(ed) the property equally, 50% each.

For simplicity, we each plan to contribute to the partnership 50% of the property basis.

As the only LLC members, we each have a 50% ownership interest in the LLC - profits, losses, etc. 

With that in mind, is the Section 754 declaration you mentioned still required? Optional? Does it apply to the partnership's federal or state return ?

[Mike9241 · Accepted solution]

@aysoref there seems to be a lot of conflicting advice 

that post about the attachment to the partnership return comes from a thread by The Tax Advisor.

Turbotax suggests a completely different method per this link

https://ttlc.intuit.com/turbotax-support/en-us/help-article/rental-income/enter-rental-property-cont... 

if you follow the Turbotax approach you'll have to keep track of the depreciation taken when it was directly on your 1040. That depreciation is also subject to recapture upon the sale of the property.

subsequent review of additional info, I would conclude that the statement mentioned above is not needed because there is no adjustment to the basis for the contributing members to the partnership

[Critter-3]

WHY in god's green earth are you switching from reporting this on a Sch E on your personal tax return (which you can do since both owners are married to each other) to a Partnership return ???   There is absolutely no benefit to this move and it requires you to file a second return for nothing.  If you are trying to limit your liability the best and easiest thing to do is have a good insurance policy covering all your properties.  

[aysoref]

@Critter-3 your question is so logical, intelligent and insightful. Thanks for that.

Setting up the partnership / LLC and letting it own the rental(s) is - as you know - a defensive move. We listened to lots of  legal advice explaining the pros and cons = protecting our personal assets and the kids' inheritance from unreasonable tenant lawsuits, greedy lawyers, etc. etc. etc. Disclaimer! I am not bashing all layers, have some in my own family and love them to pieces. That said, the extra once a year effort and cost to file partnership  taxes seems worth it. We consider it the cost of insurance against potential huge postulated  losses... like the cost of earthquake insurance...

With all the legal process already in the past, we are now only looking at the right way to satisfy the feds and state tax people... 

[Critter-3]

Ok ... so if you are going down this path I highly recommend you use a local tax pro for the personal and first partnership returns so you get them done correctly for the year of the switch.  Then come back to TT the next year.