[WSBAPT] Step up in basis with a Single-Member LLC owning real property

[Eric Reutter]

Hi all,

I stumbled across a fascinating tax issue today when researching a matter
for a client. The facts are very simple:

Client wants to use a single-member LLC to own real property.

In doing my due diligence, I want to confirm that client's real property
will receive a 1014 'step-up' in basis when the client dies (as would be
the case if the client herself owned the real property).

Simple research project right? Not quite. It turns out, after reviewing
forum postings and law review articles, that there is a current debate
raging on this very point. Some practitioners believe that the basis of LLC
interest itself receives a 1014 basis step up (the outside basis), while
other practitioners believe that the underlying asset itself, the real
estate, would receive a 1014 step up in basis (the inside basis).

A 2016 Article <http://If Revenue Ruling 99-5 governs, then the SMLLC
assets> from the Marquette law review aptly titled "Issues Arising upon the
Death of the Sole Member of a Single-Member LLC," sums up the current rift
in opinions, explaining that:

If Revenue Ruling 99-5 governs, then the SMLLC assets are deemed
transferred, and those assets receive the step-up in basis provided by §
1014 of the Internal Revenue Code.215 If, however, Pierre’s rationale can
be imported to the transfer-on-death context, the transfer of an SMLLC
interest might be treated as a transfer of the ownership interest, not the
underlying assets (contrary to the rationale of Revenue Ruling 99-5)

Could the answer to my question about whether the real estate owned in the
SMLLC receives a step up in basis at the LLC owner's death really be "to be
determined?" It is hard for me to imagine that this issue is unresolved,
since so many people own real property in a single member LLC.

If anyone can clear this question up, it would be the members of this
listserv. As always, I appreciate any insight.

Best regards,

*Eric Reutter, J.D., LL.M.*
*Law Office of Theresa Nguyen, PLLC*
707 S Grady Way, Suite 600 | Renton, WA 98057
Ph. *425.998.7295 <(425)%20998-7295>* | Fax *425.420.2695
<(425)%20420-2695>*
*www.tnguyenlaw.com <http://www.tnguyenlaw.com/>* | *eric at tnguyenlaw.com
<theresa at tnguyenlaw.com> *

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