buyout of property in partnership ... what is my new basis?

Question

Folks,

My partner and I bought a house for $150K in CA a several years back. The property is now valued at $300K. My partner wanted to sell the property or have me buy him out for $120K. So far we have about 25K in accumulated depreciation on the property (the value of improvements was $112K for the purpose of depreciation). My question for the tax gurus is as follows:

. After the buyout, what will be my new cost basis in the property?

. What will be my new basis for depreciation?

. Who gets taxed on the 25K of accumulated depreciation after the buyout? Will I get taxed on that when I go to sell in a few years?

. Will the buyout trigger reassessment for property tax purposes?

Thanks.

Account Closed · Answer

Let's run the numbers.

1.)  You paid $150,000 for the property.

2.)  You spent $112,000 for improvements.

3.)  Your total cost of acquisition is $262,000.

4.)  Each of you began by owning a 1/2 interest worth $131,000.

5.)  You have claimed depreciation of $25,000.

6.)  You have a Depreciated Basis of $237,000.

7.)  This is a Depreciated Basis of $118,500 for each of you.

8.)  Your Partner is selling his 1/2 to you for $120,000.

9.)  He will have a Capital Gains of $1,500.

10.)  The IRS requires that the first dollar be treated as Depreciation Recapture, and each dollar after that until all of the Partner's 1/2 of the Depreciation is accounted for.

11.)  Therefore, his $1,500 of Capital Gains will be taxed at 25% as Depreciation Recapture.

12.)  Now, you are paying him $120,000 for his 1/2 so that you will own 100%.

13.)  Add the $120,000 to what you already have as a Depreciated Basis and you have $238,500 as your new Depreciated Basis in the property.

14.)  You have already claimed $12,500 in depreciation, and you will have to pay the tax on this amount when you sell, as well as any additional depreciation that you claim after you acquire total ownership.

15.)  You will continue using the Depreciation Schedule that you are now using for the 1/2 that you already own.

16.)  You will create a new Depreciation Schedule for the 1/2 that you are acquiring.

I ran through this pretty fast, so some of my numbers might be off, but don't worry because someone will probably be on here shortly trying to get her friends to jump on here and attack my answer, and we'll find the mistakes.

I hope this helps.

Good Luck.

Michael Lantrip

Account Closed · Answer

So, now you say that you don't own the property.  The property is owned by an LLC.

You want to know about buying half of the membership interest in the LLC that you don't already own.

I'm sorry, but that is not the question you asked.

That requires looking at your Operating Agreement and a number of other documents.

Disregard what I have previously written.

Account Closed · Answer

Sorry, I was managing an unruly crowd.

Here are the numbers.

1.)  You paid $150,000 for the property.

2.)  You assigned $38,000 value to the land.

3.)  You put the building on your Depreciation Schedule at $112,000.

4.)  You have claimed $25,000 in depreciation.

5.)  Your total cost of acquisition is $150,000.

6.)  Each of you began by owning a 1/2 interest worth $75,000.

7.)  You now have a Depreciated Basis of $125,000.

8.)  This is a Depreciated Basis of $62,500 for each of you.

9.)  Your Partner is selling his 1/2 to you for $120,000.

10.)  He will have a Capital Gains of $57,500.

11.)  The first $12,500 of this will be Depreciation Recapture.

12.)  The remaining 45,000 will be Capital Gains.

13.)  You are paying $120,000 for his 1/2 so that you will own 100%.

14.)  Your new Basis will be the $75,000 that you originally paid for 1/2 plus the $120,000 you are now paying for the other half, a total of $195,000.

15.)  Your Depreciated Basis will be $182,500 which is the $195,000 that you have put in less the $12,500 depreciation you have claimed.

16.)  You will continue to depreciate the first 1/2 that you purchased on the Depreciation Schedule that you now have.

17.)  You will create a new Depreciation Schedule for the 1/2 that you are now purchasing, using the $120,000 price less $19,000 assigned to the land.

I think I covered everything there.

Sorry for the misunderstanding, but that is often how it is when you are doing tax accounting.

I hope this helps.

Michael Lantrip

Account Closed · Answer

Are you saying that you paid $150,000 and assigned $38,000 to the value of the land, leaving $112,000 for the value of the building, the amount to be depreciated?

If so, substitute this number for $262,000 in my analysis, and run the numbers.

Let me know if you want me to do it.

Be glad to.

Michael

Mahesh K. · Answer

The property is held in an LLC. The idea of holding it in an LLC was to provide liability protection. Both of us have an equal 50% state in the property. Would the math be different if it was held as tenancy in common?

Thanks.

Mahesh K. · Answer

Thanks, that makes sense.

The property is held in an LLC and we file form 1065, would this be considered a purchase of a share of a partnership or a sale of a property? I am not sure if this will trigger a property reassessment.

Mahesh K. · Answer

Michael,

I should have clarified:

. 112K was the basis of depreciation (i.e. 75% of the purchase price). We have already accumulated (claimed)  25k.

Also what would be my cost basis when I go to sell the property?

Thanks,

buyout of property in partnership ... what is my new basis?

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