How do I report a step up in basis from sale of S Corp assets in ProSeries?

[Lori815]

Husband is sole member of LLC taxed as an S Corp dies in May 2018.   Wife inherits S Corp and sells S Corp assets AND building it operates out of (owned by H&W) on Sept 1, 2018.   I need to be able to increase the basis in the Assets and Building to FMV on DOD.   How do I do this in ProSeries?

[IRonMaN · Accepted solution]

Are you sure the assets get a step up or is it the stock basis.

[lauralynnbrother]

It is my understanding that the basis of qualified joint interests in property will be adjusted to FMV (or a step up in my case) at DOD to extent they are included in the estate of deceased spouse even if no Estate Tax return is filed.   I believe this relates specifically to the Building Sale.   The Sec. 1245 Assets sold from the S Corp would also receive a step up in basis at DOD because wife inherits the LLC.   Husband dies May 9th, 2018......business and building sell Sept 1, 2018........FMV easy to determine.       

[loirb0313]

BTW.....it was an Asset Sale

[rbynaker]

The problem I see is that the building/assets were not owned by the deceased.  They were owned by an LLC, which is a separate legal entity.  So the assets themselves do not get a step up in basis, what gets stepped up is the basis in the LLC (the deceased share of the value of the LLC ownership percentage).

Rick

[loirb0313]

The Building was owned by the H&W jointly so W would receive a step up in basis......at least for her half.   The assets were owned by the LLC.....so yes, I would agree that the LLC basis would get a step up in basis due to the CG's being reported to Member on Final K-1.    Wouldn't the step up in basis of the LLC interest effectively reduce the CG's being reported on the 1040?

[IRonMaN]

Yes to both.

[loirb0313]

So, my real question it how to change the basis in ProSeries?     Is there a worksheet for the adjustment to the Basis that I am missing?

[IRonMaN]

I would just enter a new asset with the new basis.

[loirb0313]

If I enter a new asset with the adjusted basis, my old asset (aka....building ) will still be there.   There has to be a way to adjust the basis.   This cannot be the first sale of a building where the basis needs to be adjusted.

[IRonMaN]

But you have an asset that has a basis change during the year.  I would enter a sale date equal to the date of death on the original asset but don't enter any sales price.  That will kill the asset for depreciation.  Then enter the new asset as of the date of death and show the actual selling date and selling price.

[rbynaker]

Also, keep in mind you'll get a different step-up depending on whether or not you're in a community property state.  Here in VA (a non-CP state), assuming the building is owned 50/50 by H&W, I'd split the original basis/accumulated depr 50/50 (I'm assuming this is on a 1040 Sch E as a rental property?) and then put in the date of sale on one half of it.  Then, as IRonMaN said, create a new asset for the stepped-up inherited half of the building.  The "wife" half of the building continues to depreciate based on her basis, the "inherited" half starts over using her new basis.

Are we having fun yet?

[loirb0313]

Yes Building is on Sch E with 50/50 ownership.  After a quick look,  it does look like Sect 754 election refers to Partnerships only.    

[Marc-TaxMan]

Don't you have to do a 754 election to get an "inside basis" asset step-up?

PS used to have that election.  I have not looked recently

[IRonMaN]

But there isn't anything "inside" being stepped up in this case.

[loirb0313]

I would agree there isn't anything "inside" to step up.   S Corp owns assets, they are sold after sole member death to an unrelated third party.   The assets are sold for capital gains.   Capital Gains are added to basis of now deceased member which is the step up.   Although admittedly, I am not real conversant in Sect 754.  

[rbynaker]

And doesn't 754 relate to partnerships anyway?  The facts keep getting updated as we go but I thought this was an LLC electing to be taxed as an S Corp.

[loirb0313]

The facts remain the same.....LLC taxed as an S Corp

[rbynaker]

You might also look at IRC 1377:

https://www.law.cornell.edu/uscode/text/26/1377

And regs:

https://www.law.cornell.edu/cfr/text/26/1.1377-1

You have some options regarding how things get allocated on the K-1s between husband/wife.  Default is pro rata per share per day but there may be a "closing of the books" election available.

[loirb0313]

there is only one shareholder.....single member LLC taxed as S Corp