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Tax Law (Questions About Taxes)/Future tax issues for property owned in a trust which is a partnership asset

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QUESTION: My father passed away a very recently and my mother 3 years ago.  All of their assets were put into a revocable living trust as they acquired them. We hope to liquidate all of the assets fairly quickly except for one.  The unsold one will be half ownership in a partnership.  Each partner (in my parent's case their trust, an LLC in the case of the other partner) owns an undivided half share of a property which has a rental house on it. My father receives a K-1 each year which has been a loss the last few years.

I will be consulting with a tax attorney in the near future, but am wondering about a couple of things in the meantime--I want to at least know how to ask the right questions.  I know that property normally gets a stepped up basis to it's value at the time of the owner's death.  How does that work in this case?  
Thanks

ANSWER: Mary,

Thanks for your question.

You will have to obtain a valuation of the business as of the date of death. You can hire a business valuation specialist or do it yourself. Here is a quick overview of some techniques used to make a valuation. http://www.collin.edu/sbdc/docs/Business-Valuation-Methods.pdf

Hope this helps.

John Stancil, CPA

---------- FOLLOW-UP ----------

QUESTION: My question actually has to do with how the stepped up basis is handled for tax purposes.  As of last year, my father had a basis of $330,000 in the partnership.  The appraisal we got (as of his death date) values the property at $1,000,000 so $500,000 for half but also gave a lesser amount--$390,000--because it is undivided.  So we have a basis inside the partnership and the stepped up basis outside the partnership (not sure if we can use the $500,000 or have to use the $390,000).  We hope to sell the property in the next 2 or 3 years and will get a K-1 from the partnership reflecting capital gains based on the partnership basis. How is this handled?  We will be using a professional but I know that there can be differences of opinion.  This may be too complicated for me to comprehend but I would like to try to understand enough to feel confident that our tax person is doing the right thing.
Thanks

Answer
The K-1 should not reflect the basis, as outside basis is not necessarily known to the trustee or to the company. It would simply show the proceeds.

I'm not sure why the appraiser gave the basis due to it being undivided. I would go with the larger amount unless there were a compelling reason to use the lower amount.

Hope this helps.

John Stancil, CPA

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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