Discussion:LLC and member equity

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Discussion Forum Index --> Tax Questions --> LLC and member equity

EFCPA (talk|edits) said:

25 December 2006
Taxpayers (husband and wife) own rental property jointly. original cost of property is say $200,000 and there is a mortgage of $125,000.

Property is held for a few years and the market value of the property increases to $350,000. Taxpayers then borrow on the equity of the property, causing the debt to now be $250,000.

After the increased borrowing, taxpayers form an LLC and transfer the property to the LLC. Result - tax basis (net of acc depr) is $180,000, but debt is now $250,000. The cash received by the taxpayers prior to transfer to the LLC was retained personally by the taxpayer, to be used in acquiring future property, but the funds were not transferred in to the LLC.

Is there a problem in transferring the property to the LLC when the debt exceeds the tax basis? How should the excess of the debt over the basis (in this case $70,000) be shown on the LLC books? Advances to members? Member draws?

Riley2 (talk|edits) said:

25 December 2006
The transfer of debt from the individuals to the LLC is not a taxable event since each member's share of debt before and after the transfer is the same.

Kevinh5 (talk|edits) said:

17 January 2007
except in this exact situation where debt relief is more than basis.

Dennis (talk|edits) said:

17 January 2007
If the debt is recourse there is no relief.

Kevinh5 (talk|edits) said:

17 January 2007
Reg ยง1.752-1(a)(1) says that the recourse debt is allocated to the partners who bear responsibility for the debt - this is for OUTSIDE BASIS purposes.

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