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

Tue Jul 25 19:10:30 PDT 2017

Eric:

The SMLLC is a disregarded entity while the Member Owner is alive (assuming she is unmarried and if married has not elected to treat the LLC as a partnership). 

In that case, how does the underlying asset not receive a Sec. 1014 basis adjustment at death? 

If the LLC is a partnership for tax purposes, the Sec. 1014 adjustment would be to the outside basis. However, you would be able to make a Sec. 754 election to adjust the inside basis.

Only if, for whatever reason, the Member elected to characterize the LLC as an association taxable as a corporation (whether a C corporation or an S corporation) would there be no inside basis adjustment. I don’t believe Rev. Rul 99-5, which deals with the income tax consequences of conversion from SMLLC to multimember LLC stands for the proposition that a SMLLC is treated as an association taxed as a C corporation for Sec. 1014 purposes. 

John Sullivan

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Eric Reutter
Sent: Tuesday, July 25, 2017 6:21 PM
To: wsbapt at lists.wsbarppt.com
Subject: [WSBAPT] Step up in basis with a Single-Member LLC owning real property

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%20Revenue%20Ruling%2099-5%20governs,%20then%20the%20SMLLC%20assets%20>  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.  <tel:(425)%20998-7295> 425.998.7295 | Fax  <tel:(425)%20420-2695> 425.420.2695
 <http://www.tnguyenlaw.com/> www.tnguyenlaw.com | eric <mailto:theresa at tnguyenlaw.com> @tnguyenlaw.com 

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