Multi member LLC partnership sale of rental property held in personal name of members

[taxladyworking]

Four family members received rental property from their father as a gift and thereafter established a multi-member LLC partnership to transfer the rental property into. The rental property has been depreciated during the duration of the LLC existence on the yearly tax return of the LLC Partnership Return. The members are now selling some of the rental property and I have been informed by the title company and one of the members that the property was never transferred to the LLC on the advise of their attorney. Also, the members now state that the property was inherited after their father passed away and they want to use the stepped up basis for the sale. Since an LLC can not depreciate property that it does not hold a title to and the sale of the property is in the names of the LLC members it must be handled on their personal returns. How do I handle this? My thoughts are to not claim anymore depreciation on the LLC return and claim the sale on their personal return using the adjusted depreciated basis as the cost.  Any suggestions are appreciated.

[sjrcpa]

The people and the LLC need legal advice.

And is it too convenient that, now that there is a s ale (with a big gain?), that they inherited it giving rise to a larger basis than what they were using if it had been a gift?

This smells a bit.

[abctax55]

now state that the property was inherited after their father passed away...

So what does the will/ estate tax return say?

What have the property tax statements said (as in ownership..) all these years?

Personally, I'd put on my running shoes.

[Just-Lisa-Now-]

"The rental property has been depreciated during the duration of the LLC existence on the yearly tax return of the LLC Partnership Return."

"Since an LLC can not depreciate property that it does not hold a title to and the sale of the property is in the names of the LLC members it must be handled on their personal returns."

Im so confused.

[George4Tacks]

"the property was never transferred to the LLC on the advise of their attorney." Get a letter from the Attorney with those facts, along with a nice big check for all the time you will now need to commit at the worst time of year.

Get a really big retainer and prepare amended LLC returns with no activity for every year that was filed with improper information. This will also require amended returns for all of the LLC members.   

I would be inclined to put on those sneakers, and run as fast as you can if they are unwilling to correct prior year returns for information that was not shared with you. 

[abctax55]

Dad's returns will have to be amended too - right?

And if those returns result in refunds from more than three years back....those refunds are lost - right?

My head hurts.

I suggest not just an attorney - TAX attorney !

[taxladyworking]

Yes, I agree this is not what a tax professional wants to be dealing with at this time of year.  I think the following will need to be done. As you mentioned, file amended returns for all years the LLC Partnership filed with the rental property and reflect zero income (no activity). Since the rental property deed is held in the members personal names, I will be filing amended returns for my client for the same years and reflect their share of the income and expenses as well as depreciation on a Schedule E. Additionally, informing the other 3 members to file amended returns with their own tax professional. If someone has another solution as to how to handle this, please advise. 

I also, mentioned in my question that the members sold the rental properties and are now stating the property was received as inheritance, therefore they get a stepped up basis on the sale. I disagreed with this since I remembered it differently. I have found in my archive client file a copy of the Bargain and sell of the rentals and it clearly states that the true actual consideration paid was a gift as well as a copy of the letter sent to all tenants (from the members attorney) that the rental properties were sold to the LLC members.  If they choose to ignore my documents, I will put on those running shoes as suggested.