What happens to stepped up basis when some shares are gifted

[Camas Lilly]

Tax time question for you now. When mom passed away, the home was left to three siblings. 12 years later, one has gifted his shares to the other two siblings, the LLC has been dissolved and sister has bought out my shares. Over the years the % of ownership has tilted in favor of the remaining sibling, so brother and myself now owned around 27% each, with sister owning 46% of the home.

Here is a short explanation from the Attorney of how this went.

This is the email I received from the attorney last week:

I have been pondering your situation and I think the best way to proceed is as follows:

1. Brother disassociates from the LLC (resigns) which would require all three Members to execute a Resolution. The Resolution would indicate that Brother is gifting his equity in his capital account to you and sister.

2. An amended annual report is filed with the Secretary of State showing only you and sister the Members.

3. The LLC transfers the Property to you and sister tenants in common.

4. You and sister execute a basic purchase and sale agreement whereby sister sells the property to you. I would include details regarding the transfer in the excise tax affidavit and the purchase and sale agreement. The Department of Revenue will likely take a hard look at the transaction and we want to make sure they have all of the information needed when we file the excise tax affidavit.

5. File Certificate of Dissolution of LLC with Secretary of State.

My question is on my stepped-up basis. Is it now:

1) 1/3 of the value at TOD, or
2) 27% + 13.5% (half of brothers) = 40.5% of the value at TOD?

 

[38Chevy454]

Is the intention to avoid your brother having any capital gains? It seems there is likely an increase in value since the transfer on your mother's death. Somewhere there is capital gains on your brother's share. However since your brother is gifting his shares, it seems like you and sister should absorb the cap gain. I am not sure how to make that happen. Just throwing out for discussion.

 

[cathy63]

It's 40.5% of the value on the date of your mother's death. Your brother's basis in his shares of the LLC was established when your mother died (as was your basis), and there is no step-up when he gives them to you. His basis is divided evenly between you and your sister.

Your brother is not subject to any capital gains tax. The cap gains tax is paid by the people who eventually sell the house, i.e. you and your sister.

 

[Camas Lilly]

It's 40.5% of the value on the date of your mother's death. Your brother's basis in his shares of the LLC was established when your mother died (as was your basis), and there is no step-up when he gives them to you. His basis is divided evenly between you and your sister.

Your brother is not subject to any capital gains tax. The cap gains tax is paid by the people who eventually sell the house, i.e. you and your sister.

Thanks. That is what I thought, but wanted to be sure before I tackle taxes in the next few days.

 

[Camas Lilly]

Should I expect any tax forms for the transaction above for me to be able to file my taxes?

 

[cathy63]

Should I expect any tax forms for the transaction above for me to be able to file my taxes?

You need a form K-1 from the LLC for tax year 2021.

You also need whatever documents were produced when the house sale was completed; property tax bills you paid; 1098s from the mortgage holders if there are any; etc.

 

[SecondCor521]

It would seem to me that if the percentage shares shifted over time (which OP stated), there was probably some sort of agreement - "You pay the property taxes this year and I'll give you 1% of my share" or something - which would affect and need to be figured into basis...@cathy63?

 

[cathy63]

It would seem to me that if the percentage shares shifted over time (which OP stated), there was probably some sort of agreement - "You pay the property taxes this year and I'll give you 1% of my share" or something - which would affect and need to be figured into basis...@cathy63?

I'm relying on my memory of a couple previous threads, but I believe this house was owned by an LLC, not directly by the three siblings. Camas Lily's sister has invested additional money into the company over the years. We don't know if those funds were used for improvements or to pay expenses, but as a result of her investments, the sister has ended up with more shares in the LLC than her siblings. Since the LLC is required to issue a K-1 to each partner every year, the difference in basis should be accounted for on those forms.

 

[Camas Lilly]

I'm relying on my memory of a couple previous threads, but I believe this house was owned by an LLC, not directly by the three siblings. Camas Lily's sister has invested additional money into the company over the years. We don't know if those funds were used for improvements or to pay expenses, but as a result of her investments, the sister has ended up with more shares in the LLC than her siblings. Since the LLC is required to issue a K-1 to each partner every year, the difference in basis should be accounted for on those forms.

Unfortunately, we never received anything on an annual basis from the LLC so when we discovered our shares were shrinking, we were quite surprised. I went back and re-read the LLC agreement and what she was doing was perfectly legal, but we should have been given the choice of contributing to any other expenses or take it out in equity. There was some cash (life insurance, bonds, etc) at the beginning that was used for repairs and some of the remodel, so we were unaware of some of the other expenses, particularly annual losses she was claiming. This is one reason I wanted out of the whole thing. I would rather cut my losses now, move on and retain some sort of family relationship, if there is one. Sis is a CPA so in my book, this was not right, but I also should have been paying more attention instead of letting "CPA" sister take care of everything. I really didn't think I needed to. Lesson learned.

 

[Camas Lilly]

By the way, how do I file my taxes if I don't receive the Form K-1?

 

[cathy63]

By the way, how do I file my taxes if I don't receive the Form K-1?

I'm sorry, this is beyond my experience. I don't know how you can be a partner in an LLC and not receive a K-1 every year. Even if one partner reported the entire profit or loss, I would have thought the other two partners should still receive K-1s with $0 on them. Obviously I am wrong about this, since it happened to you, so I am not sure what you should put on your taxes.

Since you have an attorney who knows the story, I would recommend that you consult with him/her about the types of docs you need to complete your tax return. I also think this would be a good year to have a professional tax preparer work with you on them.

 

[Camas Lilly]

I'm sorry, this is beyond my experience. I don't know how you can be a partner in an LLC and not receive a K-1 every year. Even if one partner reported the entire profit or loss, I would have thought the other two partners should still receive K-1s with $0 on them. Obviously I am wrong about this, since it happened to you, so I am not sure what you should put on your taxes.

Since you have an attorney who knows the story, I would recommend that you consult with him/her about the types of docs you need to complete your tax return. I also think this would be a good year to have a professional tax preparer work with you on them.

Yes I already sent my questions to the attorney that handled the dissolution of the LLC. I’ll do a run through on the taxes in the next few days but you are probably right about having a pro do them this year. Already I’n the back of my mind.