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jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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I have a two member LLC in the state of TN. We bought a commercial

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I have a two member LLC in the state of TN. We bought a commercial office condo property in January 2006. It was sold in May of 2007. I want to make sure I am calculating gain correctly on tax form. Need advice.



When the property was recorded on the 2006 return there should be a list of assets that were depreciated. Those assets will be disposed and the gain reported on the 2007 Form 1065 using Form 4797 You will have to make an allocation of the sales price and costs of selling to each of the assets that was on the prior return. Usually this is done giving each asset the same percentage as was used for the purchase price allocated to the asset.


You will take depreciation in year 2007 using the same convention as in 2006 - half year or mid-month or mid quarter. Most tax software will do this based on the sales date entered for the asset.


The land is reported in part I of Form 4797 as well as any assets that were sold for a loss. The building, furniture and other depreciable assets sold for a gain will be reported in Part III of Form 4797. The 2007 Instruction 4797 are fairly straightforward.


The amounts from the 4797 will flow to Schedule D and to the partner's Schedule K-1 to reflect the partner's pro rated (50/50) share of the net gain that will be reported by the partners. .


I hope this helps for reporting the gain on the sale of the property by the partnership.


Best regards.











Customer: replied 8 years ago.
I will review with Turbotax later tonight or first thing in the morning. I am on my way to an engagement and cannot "digest" the answer. After reviewing with software entries, I will get back to you either with payment and/or additional questions. I am not really sure how all of this works with additional questions, but I am happy to do whatever it takes to resolve the issue at hand.

Thank you,
Kraig Wall

Thank you for advising me of your schedule.


We can proceed however you wish either in this thread or once you get a satisfactory answer here you can post another question.


I will look forward to your next reply in order to help however I can.

Best regards.

Customer: replied 8 years ago.
I apologize for the delay. I had to set this project aside for the last week. I have picked back up and am clear to finalize this return through Thursday. I would like to follow-up on our initial conversation.

Although I assume your answer to be completely accurate, my problem is sorting through the HUD and last year's figures to assure that this was done correctly from the prior year. I am concerned when looking at the purchase HUD and the sales HUD that I do not know how to interpret it correctly to establish the cost basis for the sale and then the gain. That, along with the depreciation.

If we depreciate for 2007, doesn't both year's depreciation have to be rolled back into the gain, and what is the appropriate way to show that on our books? We have the Asset and Accumulated Depr. on the balance sheet side. What do we do to make the proper entry on the P&L side? How do we calculate the depreciation properly and then adjust at the final sale?

Am I being clear enough?

Hello again,


Since this is described as a condo I will presume none of the purchase price was allocated to land and no asset is on the books for land. Also, I will use in my example only the condo building and no other assets as part of the purchase (even though in some cases there may be both real property, a building, and other personal property, furniture or landscaping or fences or other, that may be part of a purchase.


The HUD-1 has a contract (or sales) price and also has a column for expenses paid by each the buyer and the seller. HUD-1 page 2 has a total of the expenses at the bottom for each party. Most of the page 2 expenses are part of the cost basis of the property except for any items that were reserves and for any currently deductible expenses, such as property taxes paid.


If you take the total of the contract price and the total expenses less any reserves that will likely be the total cost basis (unless there were some HUD-1 items currently deducted). There may or may not be expenses that are Paid Outside Closing and those may or may not have been noted on the HUD-1 - usually as a note next to the description marked as POC and these are not listed in the column.


HUD-1 page 1 has a section of items paid by or for each other. If items are paid by the seller for the buyer those would reduce the cost basis or the expense from page 2. Items paid by the buyer for the seller will increase the expense taken or the cost basis.


All of that was just to allow you to get a figure from the HUD-1 to compare to the assets that were recorded for the sale since you were not confident that the purchase was recorded properly. This figure is your cost basis and should be the total recorded as the purchase price of the asset(s).


You must continue to take depreciation expense for the part of the year that you owned the asset in the method and convention for that asset. For example, if the building was straight line depreciation and midmonth convention (as usual) and you had 1200 depreciation expense per year in a prior full year you would take a fraction equal to the middle of the month is was disposed. For selling in May you would take 4 1/2 months ( or 4.5/ 12 times 1200 full year ). Depreciation expense and accumulated depreciation are recorded in the usual manner.


The sale of the asset is recorded by decreasing the asset account and the accumulated depreciation for the totals for the asset sold and increasing cash by the net from the sale. The difference will be recorded as gain on the P&L, often as an Other Income account so as to be distinguishable as a one time event on the P&L.


I hope these additional answers are useful as you work through recording the sale of the asset. You may want to consider a consultation with a local tax practitioner that could look at the actual HUD-1 and journals to verify that the entries are correct using your particular figures.


Best wishes.




jgordosea and other Tax Specialists are ready to help you
Customer: replied 8 years ago.
Thank you.
You are quite welcome. Thank you for the opportunity to be of service.