Discussion:Change in ownership % without triggering capital gain

Three individuals A, B, C purchased a land to build a shopping center with each owing 1/3. The deed was issued to A, B, C. However, A actually has 2 other partners, D and E. In a written agreement between A, E, and D, they each own 1/3 of A’s investment in ABC venture. A does not want to quitclaim deed any of the ownership % to D&E, because that would trigger, capital gain to A also the property taxe will increase which could be substantial.

Can A create a LLC and transfer her share tax-free and subsequently sales 1/3 of the stocks of the LLC to each of the E and D at cost?

Is there any other way that E & D could legally have ownership % without triggering Sells. I spoke with an attorney and his advise was for A to issue 1099 as nominee. I believe this could get more complicated especially since A wants to protect herself through creating a LLC. I thank you for your time

Why doesn't the written agreement give them the requested legal ownership? Or are you really asking how to change the ownership structure so D and E have direct ownership in the land? I think the community here would need to know the following before answering the question:

1) Is "ABC venture" a legal entity? If so, what type? If not, why not?

2) Who purchased the land - A, B & C as individuals or the ABC entity (if it is an entity)?

3) When did A, B & C (or the ABC entity) purchase the land?

4) Is there an entity involved in the "ADE" written agreement? If so, what type? If not, why not?

5) When was the ADE written agreement entered into?

6) Why is a 1099 being issued if the land hasn't been developed yet? (Or are you thinking about in the future when the project is throwing off income?)

I think I know how some of these questions will be answered by you, but there is no reason for me to guess when you can supply the correct answer.

Hopefully the community can help once clarification is given.

A, B, & C are three individuals that purchased the land under their personal name. For some reason, at the time of purchase, they did not wanted to involve D & E. So, A had this agreement with D & E that each get 1/3 of A’s investment. Unfortunately, an attorney did not draw the agreement between A, D & E. D & E thought that the agreement between A, D & E is adequate. 1-ABC is not a legal entity. It should have been. Their new attorney is crating a LLC and transferring the land to the LLC 2-ABC purchased the land as individuals 3-Purchase date Jan 2005 4-ADE entered in to agreement right before the purchase of the land. Here is the twist, ADE formed a LLC in Jun 2005 5-As far as 1099, I was, as you stated, thinking a bout future when the project is throwing off income Thank you

I do not think you have a problem as long as "ADE LLC" is admitted as a memebr of "ABC LLC". Here is how I see it:

1) Since A, D & E entered into their agreement before A, B & C purchased the land, A did not sell 2/3 of his share of the land to D & E. It can be considered that A was merely the conduit through which D & E funded their portion of the purchase price.

2) Since ADE LLC was created last year, I assume that it was funded by A by transfering the 1/3 interest in the land and funded by D & E with the written agreement showing D & E each own 1/3 of that interest (and perhaps some de minimus cash). If not, then that should be done before ABC LLC is created. (You state that the new attorney is creating the LLC (rather than already created) so I assume that it hasn't happened yet.) If money was also borrowed to purchase the land, then the bank would probably have to approve ADE LLC as a mortgagee before the transfer is legal, but should easily do so with A, D & E's personal guarantees if they are credit-worthy. Presumably A is credit-worthy since the land was already purchased and if there is a loan.

3) Since A, D & E would now each own 1/3 of the outstanding units of ADE LLC, they can enter into another agreement that cancels the first agreement (that states D & E own 2/3 of A's interest in the land). If A fronted all of the money, then he would hold onto the promissory notes entered into by D & E.

4) When ABC LLC is created, ADE LLC funds it with its interest in the land. ABC LLC will issue a K-1 to ADE LLC which in turn will issue K-1s to A, D & E.

Transfer and property taxes should not be an issue from the ADE end of things since it is already an issue from the ABC end of things. (The transfer of the land to ABC LLC may trigger a transfer tax and an increase in property tax assessments. Different counties have different rules and a good real estate attorney will know them.)

Please keep in mind that I do not know all of the facts of the situation and that neither you nor your clients can rely on any part of this writing for any particular tax situation. As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

As I said, the transfer tax is quite possibly already going to be triggered when the land is transfered to ABC LLC. So it sounds like you know it is an issue, but that A, B & C (and possibly the attorney setting up ABC LLC) did not realize it was an issue. I think what is happening is that a "general" attorney was hired to create an LLC and that a real estate attorney has not been hired. And, since you keep bringing up the transfer tax (even though an attorney is going to transfer the land into ABC LLC), it must be a significant chunk of money.

Have A - E pay for a good real estate attorney. Asking questions in a forum like this and "banking" on the answer that may not be correct for the exact facts & circumstances of the situation (which I still do not know) is not the way to go about this.

And if it is just for personal knowledge, then have your friend A tell you what the real estate attorney tells her. Then you will know for sure for A's exact situation.

Sorry, but that's all I have.