Buying into a fully depreciated property...options?

Question

My business partner owns a large multi-family property that he’s offered I buy into in the near future.  I’m very interested in the deal, but he’s owned it for a long time and there is very little depreciation remaining beyond ongoing capex.

Are there any ways to buy into an existing LLC that would provide me as a new LLC partner depreciation to shelter my gains for years to come (effectively resetting depreciation for me) but wouldn’t require my partner to sell the property to a new LLC we setup together, exposing him to significant taxes on his gains?

Thanks for any input!

Eamonn McElroy · Answer

You can buy into his LLC.  I'm assuming it's a SMLLC taxed as a disregarded entity.  Effective the date you buy in, it becomes a partnership for federal income tax purposes unless a corporate tax election is made.  It's recommended that you get an operating agreement in place effective the date of the buy-in.

"Are there any ways...to shelter my gains for years to come (effectively resetting depreciation for me)"

Ask your tax advisor about structuring the purchase so that a Sec 754 election for the partnership and Sec 743(b) adjustment for the interest you buy can be done.  Your business partner will have to agree.

Eamonn McElroy · Answer

From the legal side (you should be talking to an attorney as well), it might be smart to have him liquidate the LLC and contribute the property into a new LLC for a fresh start.

If you buy into his LLC, you're buying into potential unknown off balance sheet liabilities and lawsuits.

Nick Drury · Answer

@Eamonn McElroy , Thanks!

I will study up on the section 754 election and ask our tax advisor/attorney about how it may apply best to our situation.

If you don’t mind, I had a second scenario/structure I would be curious of your opinion on:

My partner currently owns Property A that he’s offered I buy into.  If I were to find another like kind property that we both wanted to buy together (Property B), could we form 2 partnerships, the first partnership buying Property A from my partner, and via 1031 exchange he transfer his Property A gains into his share of our partnership in Property B?  I believe it would be quite straight forward that I would get the benefit of buying property A, and our new partnership benefits from restarting depreciation for that Property, and my partner benefits by being able to 1031 and defer his gains into a new property (Property B).  In that scenario, we’d now own 2 properties together, each with depreciation starting from zero, and my partner wouldn’t get hit with a large tax bill.

Does that sound correct?

Thanks for any help!