Jump to content
ATX Community

Sale of LLC rental property to one of the LLC members


David

Recommended Posts

A rental property in a multi-member LLC was sold at market value to one of the LLC members. The LLC has other property so the LLC is a continuing entity. There are 3 LLC members each with 1/3 interest. There is no debt on the property.The LLC member who purchased the property will continue to rent the property and report it on her 1040.

The sale price was $246K and the cost was $175K.

I can't seem to find anything in my research that addresses this situation, which is odd to me. So I need to check my thinking on how to report this. Is the following correct?

1/3 of the gain from sale should be reported on each of the other 2 LLC members' K-1. The K-1 for the purchasing member will not show a gain for her 1/3 interest. Her 1/3 interest in the property will be reported as transferred to her at cost.

If this is correct, how is the sale price reported on the disposition worksheet so as to not report a gain to the purchasing member?  Is 2/3 of the $246K sale price plus 1/3 of the orignal cost (for the purchasing member) reported as the sale price? Therefore, a gain of $47K to be allocated to the the 2 non-purchasing members? Of course, depreciation would need to be factored in but I wanted to keep the example as simple as possible.

Please let me know if this is the correct approach and if not, how this should be handled.

Thank you.

 

Link to comment
Share on other sites

Technically the purchasing member is increasing her interest on the partnership but buying "shares" from the other partners. The purchasing member is receiving a partial liquidation or the partnership is distributing the house to her.

Is this a related party transaction? If so, no gain will be reported on the purchasing partner but the basis on the property will be the old basis.

Link to comment
Share on other sites

Yes, the 3 LLC members are siblings. The property was deeded out of the LLC and to the purchasing member and her husband.

So isn't this considered a sale of the rental property by the other 2 siblings and a transfer, or distribution, of the purchasing member's 1/3 adjusted cost basis? Therefore, the purchasing partner's basis will not be the old basis but will be 2/3 of the FMV paid to the other 2 siblings plus her adjusted basis (old basis)?

Thanks for your help with this.

Link to comment
Share on other sites

21 hours ago, Pacun said:

Technically the purchasing member is increasing her interest on the partnership but buying "shares" from the other partners. The purchasing member is receiving a partial .

Why? David indicated it was an outright sale of partnership property to a "purchasing member" at what sounds like fair market value.  Maybe I am missing something, but why would that be treated a partial distribution instead of a legit sale?

David also indicated the purchasing member will remain a partner in the partnership which will continue renting other property. 

So unless there is a 704(c) issue related to contributed property, then why would you not treat is as a sale from partnership to partner and  allocated  gain 1/3 each?

  • Like 2
Link to comment
Share on other sites

Yeah...What DANRVAN said.   At least that was what I was thinking.   If it was arm's length and FMV, why would not the IRS want the gain on the sale?   On the other hand, the member who it was sold to may want non-recognition of their portion, but I don't think they can do that.  

I have nightmares about §704 when I think about it, but I am pretty sure it is a straight transaction reported like any other sale of an asset.

Tom
Modesto, CA

Link to comment
Share on other sites

1 hour ago, BulldogTom said:

  On the other hand, the member who it was sold to may want non-recognition of their portion,

Maybe that could have been avoided if the sale had been structured differently.  However this sounds like a done deal and now your picking up the pieces in order to file the tax return.  Maybe it's not to late to remedy the situation if all the partners are on board.

Link to comment
Share on other sites

7 minutes ago, DANRVAN said:

Maybe that could have been avoided if the sale had been structured differently.  However this sounds like a done deal and now your picking up the pieces in order to file the tax return.  Maybe it's not to late to remedy the situation if all the partners are on board.

Maybe property could have been distributed to three partners with undivided interest.  Then purchasing partner buys interest of the other two.  Section 704(c) could still be lurking.

Link to comment
Share on other sites

Thanks for all of your help.

Are you saying that I need to report the sale at FMV and allocate the gain to all 3 siblings on each of their K-1s, even the sibling who purchased the property?

Therefore, the sibling and her husband who purchased the property will report their cost at the FMV amount on their Schedule E?

No way to report the gain to only the 2 non-purchasing siblings?

Thanks.

 

Link to comment
Share on other sites

Have you seen the sales agreement David?  Is the partnership listed as the seller? I don't see any other way than to allocate the gain according to each partner's share if the partnership received a check and/ or note for the sale price.

How did the partnership acquire the property?  Are you the preparer for the partnership and the partners?

  • Like 2
Link to comment
Share on other sites

This is a new client. The siblings inherited the property and put it in an LLC in 2014.

They got an appraisal and the property was quit claimed from the LLC to the purchasing sibling and her husband for $10. The purchasing sibling and her husband obtained a mortgage to pay the other 2 siblings 1/3 each of the appraised value.

 

 

Link to comment
Share on other sites

 

From what you are saying, the transaction happened outside the partnership; the exchange is between the siblings.  The partnership did not or will not receive payments from purchasing sibling.

That sounds like a case where you could treat the property as a distribution of undivided interest to three siblings.  Then report the sale of property from 2 siblings to 1 because that is what effectively  happened.  Then there is no gain to report at partnership level and none to allocate to partners.


 

  • Like 1
Link to comment
Share on other sites

Ok, that makes sense.

The 2 siblings will of course have to report the sale on their personal tax returns. The purchasing sibling will simply show the purchase price as their cost on Schedule E. Am I thinking clearly about this at this late hour? :-)

Thanks.

Link to comment
Share on other sites

1 hour ago, David said:

 

The 2 siblings will of course have to report the sale on their personal tax returns. The purchasing sibling will simply show the purchase price as their cost on Schedule E. Am I thinking clearly about this at this late hour? :-)

 

I guess I should have said that the purchasing sibling will show the purchase price (2/3 FMV paid to the 2 siblings) plus her 1/3 cost of the property distributed to her from the LLC as her cost on Schedule E.

Thanks.

  • Like 2
Link to comment
Share on other sites

13 hours ago, David said:

 

Therefore, the sibling and her husband who purchased the property will report their cost at the FMV amount on their Schedule E?

They will have a two part basis.  First the 1/3 basis of the property distributed from the partnership.  Plus the purchase price of the other 2/3.

  • Like 2
Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...