Checkup --> journal entry for contributing capital to company with accum. depreciation.


J

jawolter

Hello. Can I have a confirmation that this journal entry makes sense. I
am contributing capital to a company. It is real estate with
accumulated depreciation on it.

(property is valued at $69,000 with 5,000 of accum. depreciation on the
books. Ownership does not "completely change" as the company owners and
the previous property owners are the same -- so no taxable event I
think)

Is this right?

Fixed Asset (Real Estate) + 69,000 Dr.
Accum. Deprec. + 5,000 Cr.
Contributed Capital +64,000 Cr.

So the contributed capital is reduced by the amount of accum.
depreciation on the books. This seems to make sense, because if i was
instead selling the property, my cost basis would decrease by accum.
depreciation... so the equity I "have" in it decreases as well when I
contribute it to a company.

Thanks!
 
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B

Beverly

Hello. Can I have a confirmation that this journal entry makes sense. I
am contributing capital to a company. It is real estate with
accumulated depreciation on it.

(property is valued at $69,000 with 5,000 of accum. depreciation on the
books. Ownership does not "completely change" as the company owners and
the previous property owners are the same -- so no taxable event I
think)

Is this right?

Fixed Asset (Real Estate) + 69,000 Dr.
Accum. Deprec. + 5,000 Cr.
Contributed Capital +64,000 Cr.

So the contributed capital is reduced by the amount of accum.
depreciation on the books. This seems to make sense, because if i was
instead selling the property, my cost basis would decrease by accum.
depreciation... so the equity I "have" in it decreases as well when I
contribute it to a company.

Thanks!
When you say that ownership does not completely change, does this mean
the company is a sole proprietorship? Is the deed being transferred
into the company's name?

I know that your contribution would result in wiping out the
accumulated depreciation on your end, but I am not so sure the company
would transfer it in with your depreciation. Normally, it is FMV or
BV, not cost to the original owner.

I guess I need more info.
 
J

jawolter

Consider the couple married and the company (LLC) owned by the couple.
So I believe there is no taxable event. The deed would transfer to the
company's name. For this case, I don't think the depreciation
dissapears...
 
J

John

Consider the couple married and the company (LLC) owned by the couple.
So I believe there is no taxable event. The deed would transfer to the
company's name. For this case, I don't think the depreciation
dissapears...
and you would be wrong.
although still a partnership for tax purposes it's a change in entity
and the "contribution" must be at FMV and holding real estate in an LLC
will have future tax consequences, consider getting real tax advice
(not cyber opinions!)
 
B

Beverly

Consider the couple married and the company (LLC) owned by the couple.
So I believe there is no taxable event. The deed would transfer to the
company's name. For this case, I don't think the depreciation
dissapears...
Keep in mind that business and personal do not mix and attempting to
carry over depreciation is quite unusual.

I'd think the rundown would go something like this:

Let's assume the FMV is $72,000 (real estate tends to appreciate).
Since you've been depreciating the property, I'll assume it was
investment property.

Your personal books:

Investment in LLC $72,000
Accum Deprec. $ 5,000
Investment Property $69,000
Gain on Investment $8,000

Now let's say that transfering the deed, etc.. costs the LLC
something... say $3,000.

The LLC's books:

Real Estate $75,000
Capital Contribution $72,000
Cash $ 3,000

Speak to your tax accountant. It appears to me that, if you do things
properly, you are going to have a personal gain since you've
depreciated the property and real estate tends to appreciate.
 
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J

jawolter

you all have been quite helpful. some family actually did this a few
years ago and paid the tax accountant and all, I'm going to talk to
them and get to the bottom of this issue. Thanks!
 
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