zhaomu0220 wrote:Dear Pros:
Hope you are all well and having a productive.
We have a client who is a partnership. They had an asset (boat) which was destroyed in Hurricane Irma. Insurance reimbursed the company the net proceeds after paying off the loan they had on it. Based on the insurance proceeds, they will have a gain. Our client then used these funds and bought a new asset (new boat) but the loaner who financed part of it required them to open a new LLC with a new EIN for this new asset. Is this gain taxable under the Section 1033. Since the proceeds were reinvested, I am thinking that the new asset will carry the basis of the old asset and therefore the gain will never be taxable.
This is almost, but not quite, correct. The basis of the replacement is reduced by the gain that was realized but not recognized. Which in 99% of cases means that the basis of the replacement asset, assuming no additional investment, is equal to the basis of the lost asset.
For example, suppose the boat was $200k, with accumulated depreciation of $110k. Adjusted basis is $90k. Insurance pays $220k and the new boat costs exactly $220k. The realized gain, not recognized for tax purposes is ($220k - $90k) = $130k. The basis of the new boat is ($220k - $130k) = $90k.
Instead of saying that the "gain will never be taxable", it is more precise to say that that "gain is deferred". If the new boat is sold for the same $220k that it cost, then $130k of gain will be taxable at that point.
zhaomu0220 wrote:
Secondly, the partnership has negative equity because of the depreciation that was taken in prior years. Since a new LLC was opened, we are going to close the old partnership. What is the best way to transfer the negative equity into the new partnership since the partners will be the same essentially.
Thank you for your time and help.
Best Regards
Do you mean the capital accounts are negative? This should only happen if the partnership has outstanding liabilities. If the new LLC assumes all the assets and liabilities of the old partnership, the new LLC will have the same equity as the old partnership. Each member of the LLC is "contributing" their share of the partnership debt and the capital accounts should carry over with no problem.
