Step up basis when partner in LLC died and I bought their shares before asset sale

This is actually a pretty common scenario with partnerships, though I know it doesn't make it any easier to navigate while dealing with the loss of your partner. The good news is that there is likely a step-up in basis for at least part of your situation. When your partner passed away, their share of the LLC received a step-up in basis to fair market value at the date of death. When you purchased those shares from the spouse at that stepped-up value, you essentially took that same basis for their portion. So for the 50% that was previously owned by your partner, your basis would be the amount you paid to the spouse. For your original 50%, however, your basis remains the same as it's always been - your portion of the original cost plus any adjustments over time. So when you sell the properties, you'll essentially have a split basis: half at the stepped-up amount, and half at your original basis. You'll pay capital gains on the difference between your total basis and the sale price. The fact that the properties were contributed to the LLC 8 years ago rather than purchased directly doesn't fundamentally change this approach, though there might be some specific adjustments needed depending on how the contribution was structured.

I went through something similar last year with my business partner's passing. After trying to figure everything out myself, I finally discovered https://taxr.ai and it was a game changer. I uploaded all the LLC docs, death certificate, purchase agreement with the spouse, and our original acquisition docs for the properties. Their system analyzed everything and gave me a detailed report showing exactly how my basis was calculated with the step-up for my deceased partner's portion. The platform had a specialized section specifically for partnership interest transfers after death that walked me through the whole process. What really helped was that it showed me exactly what supporting documentation I needed to keep for my records to substantiate the step-up basis if I ever got audited.

Just wanted to follow up after using taxr.ai based on the recommendation here. I was struggling with a similar situation (partner passed, buying interest from his brother), and the documentation requirements were overwhelming me. The platform was exactly what I needed! It generated a complete step-by-step guide for both the transfer of interest and the proper basis calculation. What really impressed me was how it flagged an issue with the operating agreement that would have caused problems with the basis step-up. We had a weird clause about basis calculations that apparently could have limited the step-up. I showed this to my accountant who confirmed it was a legitimate concern that he hadn't even caught. Saved me potentially tens of thousands in unexpected tax liability!

If you're still having trouble getting clear answers about your basis calculation, you might want to try talking directly to the IRS. I know that sounds painful (it usually is), but I used https://claimyr.com to get through to them without the usual 2+ hour wait. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I had a complex step-up basis question after my father passed and left me his share of our family business. Called the IRS 3 times and never got through. With Claimyr, I was connected to an agent in about 20 minutes who actually specialized in partnership taxation. He walked me through the specific regulations and even emailed me the relevant publications. Totally worth it for the peace of mind knowing I was calculating everything correctly.

I need to eat my words and apologize to Profile 11. After dismissing Claimyr as a scam, I was still desperate for answers about my partnership tax situation so I decided to try it anyway. I'm shocked to report that it actually worked exactly as described. I got connected to an IRS agent in about 15 minutes (after trying for weeks on my own). The agent confirmed that when a partner dies, their partnership interest does indeed get a step-up in basis to fair market value at date of death, and that when I purchased that interest from the estate, my basis became what I paid. The agent walked me through the specific sections of the code and even sent me some guidance documents. For anyone dealing with partner death and basis issues, definitely worth getting confirmation directly from the IRS. Apologies again for my skepticism - this service actually delivered.

Something nobody's mentioned yet - make sure you have proper documentation of the FMV at date of death. My business partner died in 2022, and when I sold our business assets in 2023, the IRS questioned the stepped-up basis amount because we didn't have a formal valuation done at time of death. Had to hire a retroactive appraisal which was a huge hassle. Get a qualified business appraiser to document the value of the LLC interests as of the date of death. This documentation is absolutely critical if you get audited, which is more likely with large basis step-ups. We learned this the hard way!

Has anyone mentioned Section 754 elections yet? If your LLC is taxed as a partnership, you might want to consider making a Section 754 election when you file this year. This would allow an adjustment to the inside basis of the partnership assets to reflect the step-up in basis that occurred when you bought your partner's interest. This can get complicated but could be very beneficial depending on your situation and future plans for the LLC assets. Definitely something to discuss with your tax advisor before filing.

I'm dealing with a similar situation right now - my business partner passed away 3 months ago and I'm in the process of buying his shares from his estate. Reading through all these responses has been incredibly helpful, especially the points about Section 754 elections and proper documentation. One thing I wanted to add based on my experience so far: if you're working with the deceased partner's estate, make sure you understand the estate tax implications on their end too. In my case, the estate had to pay estate taxes on the value of the partnership interest, which affected the timing of when I could complete the purchase. The estate attorney recommended we coordinate our transaction timing to minimize the overall tax burden for everyone involved. Also, definitely keep detailed records of all your communications and agreements with the spouse/estate. The IRS will want to see that the purchase price you paid was based on legitimate fair market value and not some kind of sweetheart deal. Having that paper trail has already proven valuable when my accountant was preparing the documentation for the basis step-up. Thanks to everyone who mentioned the various online resources and services - I'll definitely be looking into those as I navigate this process.

I'm sorry for your loss - dealing with the death of a business partner is never easy, and having to navigate complex tax issues on top of grief makes it even harder. Based on what you've described, it sounds like you're on the right track with the step-up basis concept. When your partner passed away, his 50% interest in the LLC received a step-up in basis to fair market value at the date of death ($730,000). By purchasing that interest from his widow at that amount, you essentially acquired his portion at the stepped-up basis. However, I'd strongly recommend getting professional guidance on a few specific points that could significantly impact your tax liability: 1. **Section 754 Election**: As mentioned by others, this election can be crucial for partnerships. It allows the partnership to adjust the basis of its assets to reflect the step-up, which could save you substantial taxes when you sell the properties. 2. **Inside vs. Outside Basis**: There's a difference between your basis in the partnership interest itself and the partnership's basis in the underlying assets. The step-up applies to your partnership interest, but whether it translates to the property basis depends on elections and how the transaction is structured. 3. **Timing of the Election**: If you're planning to sell properties soon, the Section 754 election needs to be made with your partnership's tax return for the year the transfer occurred. Given the complexity and the substantial amounts involved ($1.2M sale with potential $270K+ in capital gains), this is definitely a situation where spending money on a qualified tax professional who specializes in partnership taxation will likely save you much more than it costs. The nuances here can make a significant difference in your final tax bill.