Multi-Housing depreciation questions for a multiple person LLC

[Tim Simpson]

The following scenario is a hypothetical but fairly close to the real life situation I’m in. I’ve simplified things in the scenario for clarity.

Five years ago, two others and I formed an LLC to purchase a multi-housing rental property from the prior owner for 630K with no money down on a land contract. On our LLC 1065 we have been depreciating the property straight line 27.5 years on the 600K value of the property, minus 30k the value of the land. Recently, one of the partners decided that owning rental property wasn't for him. The remaining member and I bought him out for 5K cash each plus we each took half his portion of the debt still owed. At the time of his sale to us we still owed 540K on the property, so the remaining member and I each took on 90K more in debt (Leaving member's debt of 180K divided by 2). So, essentially the member who backed out sold his 1/3 stake for 190K (180K in debt and 10K in cash).

Since his 1/3 ownership went from a value of 210K to 190K does the value of the building go to down to 610K for depreciation purposes? For the next 1065 should we adjust the depreciation to 580K divided 27.5 (Minus 30K for the land) or continue to depreciate based on the original purchase price?

Also, for the five years all three of us owned the property, we each received 1/3 benefit of the depreciation. When the remaining owner and I sell the building someday, surely we don’t have to take responsibility for the recapture tax on the 1/3 of the depreciation enjoyed for five years by the member who left?

[Eamonn McElroy]

@Tim Simpson

This is firmly in "engage a CPA territory".

I'll provide general answers...

"Since his 1/3 ownership went from a value of 210K to 190K does the value of the building go to down to 610K for depreciation purposes?"

No, the buyout of a partner won't affect the inside basis of partnership assets, unless....(see next answer).

"For the next 1065 should we adjust the depreciation to 580K divided 27.5 (Minus 30K for the land) or continue to depreciate based on the original purchase price?"

You will continue to depreciate based on the original purchase price, however...  It may be very beneficial, and often is, to make an IRC Sec 754 election and then make an IRC Sec 743 adjustment to the the asset if a partnership interest is sold to align inside and outside basis.  I usually find that it is.  Extra depreciation from the basis adjustment is allocated to the "buying" partner(s) going forward.  Speak with your CPA.

"Also, for the five years all three of us owned the property, we each received 1/3 benefit of the depreciation. When the remaining owner and I sell the building someday, surely we don’t have to take responsibility for the recapture tax on the 1/3 of the depreciation enjoyed for five years by the member who left?"

Eventually everything will even out for tax, however an IRC Sec 754 election is the expedient remedy.