Rev. Proc. 96-10 was actually superseded by later guidance. You're better off looking at Rev. Proc. 2018-3 which addresses the current IRS position on partnership divisions. The key factors they look at now include business purpose, continuity of partnership business, and whether partners maintain substantially the same interests.

This is really helpful - the debt allocation piece is something our CPA mentioned briefly but didn't elaborate on. Can you explain more about how a reduction in debt share triggers deemed distributions? In our case, the Old LLC has about $350K in mortgage debt on the real estate, and I'm not sure how that gets allocated when we split. Does it matter if the debt stays with the property that's being transferred, or do we need to maintain proportional debt shares across both entities?

Don't forget state fees too! In NY the LLC annual fee is $25 but S-Corps pay the fixed dollar minimum tax which starts at $25 but increases based on NY receipts. Plus if you're in NYC there's another entity tax! The costs add up fast.

This is incredibly helpful! I had no idea that a single-member LLC wouldn't require a separate tax return. My attorney made it sound like I'd definitely need to file additional paperwork every year, which was part of my hesitation about the whole LLC setup. The umbrella insurance angle is something I hadn't considered either. I'm already paying for landlord insurance, so adding umbrella coverage for a few hundred dollars versus potentially thousands in annual LLC costs and filing fees makes a lot of financial sense for my situation with just one duplex. Do you know if there are any downsides to starting with just insurance coverage and then forming an LLC later if I expand my portfolio? I'm trying to balance protection with keeping things simple and cost-effective while I'm getting started.

You can absolutely start with insurance and add an LLC later - there's no penalty for transferring property into an LLC after the fact. You'll just need to update your insurance policies and mortgage (if applicable) to reflect the new owner, and some lenders require consent for transfers. The main downside is that any liability events that occur before you form the LLC won't be protected by the entity structure. But with good insurance coverage, this risk is pretty minimal for most rental situations. One tip: if you do decide to form an LLC later, try to do it at the beginning of a tax year to keep your bookkeeping clean. And definitely shop around for that NY publication requirement - prices vary wildly between newspapers and some attorneys have relationships that can cut those costs significantly. Starting simple and growing into complexity as your portfolio expands is usually the smartest approach. You can always reassess your structure as your situation changes!

Thanks for this important tip! I just checked and I think I was using an older version of the W-7 form. Where can I find the most current version? Is it available on the IRS website? The cover letter is a smart idea too. Did you include anything specific in yours that you think helped with the approval process?

You can find the current W-7 form on the IRS website: https://www.irs.gov/pub/irs-pdf/fw7.pdf - always download it directly from there to ensure you have the latest version. The current one says "Rev. September 2021" in the top right corner. For the cover letter, I kept it simple and professional - just one page that clearly stated: 1) I'm applying for an ITIN under Exception 1(d) for monetary assets, 2) I need the ITIN solely to claim property held by [state] treasurer's office, 3) A list of all documents enclosed, and 4) Contact information if they needed anything else. I think being super clear about the exception category and purpose helped prevent my application from going into the wrong processing queue. Good luck!

Great summary of the steps! For your questions about timing and wording with the state office: I found it took about 2-3 weeks to get the proper letter from my state's unclaimed property division, but I had to be very specific about what I needed. Don't just ask for "confirmation that an ITIN is needed" - that's too vague and you'll likely get generic language that won't satisfy the IRS. Instead, tell them exactly what you need: "I require a formal letter stating that an Individual Taxpayer Identification Number (ITIN) is mandatory for the release of unclaimed property claim #[your claim number]. Please include my full name as it appears on my identification documents, the specific claim amount, and explicitly state that the ITIN is required before funds can be released." If the first person you speak with doesn't understand, ask to be transferred to a supervisor. Some states have dealt with this situation before and have template language they can use. Others might need you to explain why the specific wording matters for federal tax identification purposes. One tip: when you call, mention that this is for IRS documentation requirements. That usually gets their attention and makes them take the request more seriously. Good luck!

Did they refund all the incorrectly withheld amounts after getting it fixed? How long did that process take? I'm in a similar situation with TD Ameritrade right now.

The main reason we set it up this way was for probate avoidance and simplified transfer if something happens to either of us. We have young kids and wanted to make sure the business could continue operating smoothly if either of us passed away unexpectedly. We did consider having just one of us own the LLC, but since we both actively work in the business, we wanted the structure to reflect our actual roles. The revocable trust seemed like a good solution for keeping everything under one umbrella, but I'm definitely open to simplifying if this creates unnecessary tax complexity.

That makes sense for probate avoidance, but you might be overcomplicating things. A revocable trust can own business interests directly without needing the LLC layer in between if you're mainly concerned about probate. If you want liability protection AND probate avoidance, you might consider having the LLC owned directly by you and your wife (as joint tenants with right of survivorship or as tenants by the entirety if Georgia allows it), then creating transfer on death provisions in your operating agreement that specify how ownership transfers. This would still provide liability protection while simplifying the tax structure. For business continuity with minor children, you could include specific succession planning provisions in your operating agreement and potentially use life insurance held in an irrevocable trust to provide liquidity. I'd recommend consulting with an estate planning attorney who specializes in business succession planning - they might be able to suggest a cleaner structure that accomplishes your goals without creating tax filing complexity.

This is really helpful - thank you for summarizing everything so clearly! As someone who's been lurking on tax forums trying to figure out similar issues, it's great to see such a thorough discussion with practical advice. One quick follow-up question for the group: if they do end up filing Form 1065, are there any specific things to watch out for in terms of how to allocate the income between the spouses on the K-1s? Since they're both actively working in the business, I assume it would be 50/50, but I'm wondering if there are any nuances with the trust ownership structure that might affect this. Also, @4d3a8e299772, have you considered whether you need to make quarterly estimated payments differently now that you're potentially moving from Schedule C to partnership taxation? The timing and calculation might be slightly different.