Discussion:LLC sale of interest

As a SMLLC disregarded entity, the capital account is immaterial. He files Schedule C (no balance sheet needed). Remaining member's basis in his LLC interest is increased by the mortgage given and the "buyout" cash given to the retiring member. As a practical matter, this basis should be apportioned to the assets of the business or to "goodwill" so that the new member can take depreciation or amortization.

When one member of a two member LLC taxable as a partnership withdraws, the partnership is liquidated for tax purposes (the LLC still exists for state law purposes, but that has no bearing on the tax result). Under 732(b), the basis of property received by a partner in liquidation of that partner's interest is equal to the partner's adjusted basis in the interest reduced by any money distributed. In your example above, if cash was distributed, the retiring partner has an $8K gain. If it's property, the retiring partner has a $2K transferred basis.

However, the original question has to do with the continuing partner, now the sole member of an LLC. I'm sure there are better partnership tax people here then me, but I think the member is treated the same, i.e. the basis in the LLC interest is transferred to the property received. For tax purposes, there are no more events since a single member LLC is a disregarded entity. The only trick here is determining the members tax basis in the LLC interest immediately before the liquidation event.

The terms of the two mortgages will determine the allocation of the liabilities between the two partners, and hence there bases, immediately before the liquidating event.

This was just my analysis. Feel free to critique.

On preview: if your concern is picking up basis for the gain recognized by the exiting member, it seems best done by papering it as a purchase by the continuing member rather than a liquidation by the LLC.

FMV of assets in 2MLLC 1065 is $20K, basis to LLC is $4k M1 and M2's outside basis in their LLC interest is 5K.

Retiring M2 leaves, gets 6K worth of cash and 4K worth of notes. His outside basis is 5K, so he has 5K of gain.

LLC now only has assets of 14K, plus owes a note of 4K.

.... help me continue

On another note, I didn't understand your comment "LLC gave a new 2nd mortgage to selling member" - are you saying that BP gave SP a promissory note (i.e., installment sale) secured by a mortgage?

M1's outside basis was only 5k. I say outside basis is increased by the 4k note the assets were subject to - I'd want to assign it to the real estate, up to FMV. The rest of the outside basis?

The relevance of Reg. 1.1(h)-1 is related to the character of the gain recognized by the selling partner (i.e., there is probably some unrecaptured 1250 gain here). [Note: Dennis may have also been referring to the inapplicability to that section when the sale of a partner's interest is structured as a redemption, but that doesn't change the amount of the gain, just the character (see the last sentence of Reg. 1.1(h)-1(b)(2)(ii)).

Kevin – let’ simplify your facts a little bit and assume that inside basis equals outside basis; accordingly, FMV = $20k, LLC’s basis = $10k, and M1 & M2 each have outside basis of $5k. M1 buys M2’s 50% interest by paying $6k in cash and $4k in note. M2 has a $5k gain on the sale of his interest. M1 is deemed to have paid $10k for 50% of the assets and that is his basis for that 50%. His basis in the other 50% of the assets equals $5k, which was the LLC’s inside basis prior to the deemed liquidation (i.e., he gets carryover basis).