Have Tax Questions? Ask a Tax Expert for Answers ASAP
Yes, you seem to have it in check. A 1099 isn't something to worry about with this anyways, so to speak, as simply transferring assets into an LLC/partnership is not a taxable transaction without certain elections that won't apply here, so let them 1099 you if they want... Your proceeds would be equal to your basis if they want to treat this like a sale (your proceeds would be the LLC interests, equal in value to the property the LLC holds, which is the property given for the LLC interests themselves.... see the circular logic), so your capital gain is $0, and if audited, you would have nothing to worry about. This is easy even going forward, assuming all six siblings in the partnership will have the same basis and contribution. Inherited money isn't taxable either, and yes, you should be able to step up the basis.
There is one more thing I believe you may wish to consider though. If the property was left equally to all seven siblings, and one sibling is seemingly getting a larger share, then a gift is taking place between the six siblings and the one receiving a larger share. Gifts are taxable to the person giving them, subject to yearly and lifetime exclusions, and with reporting requirements that you should look into as applicable. Run a google search for "gift tax return."
The stepped up basis is the amount all seven of you get to claim as basis coming out of the estate. This is before you put the property into your LLC, or rather, at the time you receive the property.
If all seven of you then received an equal interest, I would say you are running into gift tax issues by giving that amount to one sibling and dividing the remainder amongst the six. Contact your local professional and run this information by him/her. Please, trust me on this.
The 1099-S reports gross proceeds for the sale of real estate, yes. The problem is that this is not a sale, at least not with respect to putting the property into an LLC. On Schedule D, if you did get a 1099-S under these circumstances, your basis would equal your proceeds as I explained above, your gain would be $0, and there would be nothing to tax.
This is a transfer between the one and six siblings. I believe the six siblings are paying the one sibling the money, plus letting the one get away with additional acres, correct? That's why I'm saying it's a gift...
If I'm mistaken about the wording, and the one sibling is paying the six siblings for additional acres, then each of the six will get a 1099-S for the acres purchased by the one. This is actually a sale then, yes, and is taxable.
Oh boy... no. This is not right. The 1099-S should not be for that amount. This is a gift then, and you need to get professional help locally in my humble opinion.
Seven people own a property equally coming out of the estate. One then receives money and additional property from the other six, walks away with it, and it's not a gift?... This is a gift, and the amount is enough to exceed the annual exclusion, so you need to consider it as such.
The title company is deriving the $37,500 by taking the 225K and dividing by 6. That 1099-S would be correct if the six siblings owed the one sibling a debt, the one sibling got nothing out of the estate originally, and the six siblings were selling the property to the one sibling in order to pay the debt alongside the cash, for a price of 225K. That title company is being ignorant, from what I can tell.
There is no capital gain to take care of, so I hope one isn't doing so with a like-kind-exchange.
The correct way, given what you've told me, is this:
Seven people get an equal interest (about 35.7 acres). Their basis is the fair value in accordance with the estate's election, but more or less, all seven of you should be able to sell your property 100% tax free, assuming you sold it on the valuation date or shortly thereafter.
From there, six siblings give one sibling a lot of money and a little over an acre. This is the gift. A 1099 is not needed for this, as the gross proceeds if issued would be $0.
Finally, the six siblings put their property into an LLC. Putting the property into an LLC is not something that is going to be taxable to any of them. This is not even a sale.