Multi member LLC accounting for depreciation

[Tom G.]

Hello BP,

I am forming a LLC that will have multiple members. The LLC will own a rental property outright, so it should provide moderate cash flow, but after depreciation expense, the taxable income will closer to zero. The tax accounting is clear to me - all rents and expenses including depreciation flow through to each member's individual tax return. The LLC's Form 8825 would include depreciation and the members' K-1s will include their pro rata depreciation expense.

My question is how would you recommend accounting for depreciation in the LLC's internal records? Ideally, the accounting would reflect how much each member is able to entitled to safely withdraw (for instance, after a year of positive cash flow). However, if the LLC depreciates the property each year, the member's accounts will reflect much smaller amounts, potentially zero growth each year.

Is it better for the LLC to record no depreciation (i.e. carry the real estate on the balance sheet at its fair market value) and then maintain a book-tax difference each year? Or have the LLC record depreciation and have the members' accounts not reflect their "fair value" each year? Are there other options?

Thank you!