Discussion:Properly reporting sale of LLC (partnership) interest
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Discussion Forum Index --> Tax Questions --> Properly reporting sale of LLC (partnership) interest
| 24 October 2006 | |
| This must be my month with dealing with sales of partnership interests. I am not very clear on how I should report the sale of a partner's interest in a LLC. Partner is selling his 45% interest in his LLC for $75,000. His capital account at the end of his tenure should be around $30,000. Only cash will be given to the leaving partner and the partner does not have any personal debt in the LLC. Do I show the sale on the 1065 return as a Schedule D item and then show that amount on the leaving partner's K-1 so he can show gain on the sale? I am not very clear on the sale of partnership interests and would very much appreciate any input. | |
| October 24, 2006 | |
| Must be your time to learn it! Have to run, but you're on the wrong track. The 1065 doesn't care, except for a 754 election to gross up assets by the buy out. Are there more than one remaining partner? It'll show on his 1040...and on the 1065 you'll wash out his equity account and generally gross up asset values per 754, but read that stuff carefully. There are traps and pitfalls and dangers oh my. | |
| 24 October 2006 | |
| Did the partnership redeem his interest did he sell to another member? Assuming the former, Sec. 731(a)(1). | |
| 24 October 2006 | |
| The partner sold it to the partnership, the remaining 2 partners changed ownership percentages from 55%-80% and from 10%-20%. How does this play out then? | |
| 24 October 2006 | |
| Upon a redemption then Sec. 731(a)(1). However, if it is long term and one partner sells directly to other partners, then Reg. 1.1(h)-1 might come into play depending upon the type of activity. Look at Sec. 751 also. Note that Reg. 1.1(h)-1 does not apply to a redemption. Are you doing the client's 1040 and including a K-1 or are you doing the 1065. If doing the 1065 look at Reg. 1.754-1 and Reg. 1.743-1. | |
| 24 October 2006 | |
| according to the sales contract the exiting partner is selling his interest back to the partnership, which I would view as a redemption. Based on this, the partner should show a LT capital gain of $45,000 ( $70,000 for sale - $30,000 remaining capital ) on his 1040? | |
| 24 October 2006 | |
| Gather you meant 75k for sale price. I would view that as a redemption and capital gain of 45k. All assuming his outside basis is 30k and Sec. 751 is not involved. | |
| 24 October 2006 | |
| Hi: How would you distinguish a redemption from a sale? I am still not clear as to the definite distinction. Does it rely upon the documentation at the time of the "sale" of the partnership interest? In the sale of p-ship interest in my client's case, the check came from the partnership and I don't see the word "redemption" anywhere in the closing agreements that were signed. Seems that you get out of the whole 1250 situation if it's a redemption, no? | |
| 24 October 2006 | |
| Oh goodness, dare you ask ???? You can refer to the thread a few lines below this one. I don't know how to paste the thread into here --- can someone advise as that would be extremely handy to know :) | |
| 24 October 2006 | |
| Please look at the section from 2 days ago and you'll see it there :) | |
| 24 October 2006 | |
| Discussion:Sale of Apartment Building held in Partnership | |
| October 24, 2006 | |
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| 24 October 2006 | |
| Yes, a redemption by the partnership avoids Reg. 1.1(h)-1 and the associated 1250 headaches. Sec. 731(a)(1) would apply and if any unrealized receivables or inventory then Sec. 751 would apply to those. That is my understanding. | |
| 24 October 2006 | |
| ok, i received a fax of the contract signed by the partners from the laywers office. It is an agreement for redemption of membership interest. States that redemption price is $75,000 and should be made in installment payments over 3 years. Any input/help? | |
| 24 October 2006 | |
| See Sec. 761(d) regarding a partnership liquidating a partner's interest. This would be a redemption by the partnership. I believe a sale by one partner to another partner would take place between the two partners and then Reg. 1.1(h)-1 would come into play as well as Reg. 1.743-1 if the partnership so elected Sec. 754. See the last sentence of Reg. 1.1(h)-1(b)(3)(ii) regarding excluding a redemption from 1250. | |
| 24 October 2006 | |
| Sneed - as a redemption with no unrealized receivables or inventory Sec. 751, then I believe your 45k capital gain is correct. | |
| 24 October 2006 | |
| does intallment sale rules apply since he is receiving money over 3 years? | |
| 24 October 2006 | |
| Hi I dont know guys I have been looking at RIA and I find nothing that says a "redemption" of a partnership interest avoids a "disposition of a partnership interest" which does not avoid 1250 (RIA B-3855). I think just because you guys dont see "redemption" in these regs you dont think they apply. I just looked in RIA and any dispostion (I will throw in another term you can chew on) of a partnership interest is subject to 1250 under these regs 1.1 per RIA. You guys need to treat a redemption as a sale or exchange to get captial gain treatment. You cannot have it both ways. I respectfully disagree. bye | |
| 24 October 2006 | |
| I would think so. Publication 537. | |
| 24 October 2006 | |
| Chase - see example 8 as well as the drafting considerations sections in the BNA article you sent regarding a redemption in which the departing partner does not recognizeany 1250 - it is all capital gain. Also, notice the importance of using the word redemption in the agreement. | |
| 24 October 2006 | |
| See 1.1(h)-1(b)(3)(ii)last sentence -- states the paragraph (b)(3) regarding share of 1250 capital gain allocable to interest in partnership does not apply to redemptions of P-ship interests. What am I missing? | |
| 24 October 2006 | |
| Solomon - I think I am agreeing with you -- read the example again -- no 1250 on a redemption. I was responding to WesR who believes there is 1250 recapture in a redemption. | |
| 24 October 2006 | |
| Problem is the concept of "disguised sale". 45% is getting awful big for redemption. | |
| 24 October 2006 | |
| Chase - note that the key is in the wording of the agreement. It must state a redemption by the partnership and the partnership (not the remaining partners) is paying the departing partner. The 1250 will stay with the remaining partners. Think that wording is based on Sec. 761(d). | |
| 24 October 2006 | |
| Reg. 1.707-3 regarding disguised sales. Not knowing the details, may be might affect Sneed but don't think it would affect Chase. | |
| 24 October 2006 | |
| My client faxed me more documents today -- I have what is called a "Membership Transfer Agreement" whereby my client got paid what he got paid once he signed an "Assignment Instrument" as well as executed a quitclaim deed on the property. My client assigned his 3% membership in the LLC 50/50 to the 2 remaining members. I treated my client as having sold his interest back to the partnership but now seems I should re-think my approach. Does this change things for me altogether? | |
| 24 October 2006 | |
| May be someone else would have input on that wording. My thought is you are probably back to your original analysis. That is, stuck with Reg. 1.1h-1. I would guess the remaining members wanted the agreement constructed in such a way that the departing partner would bear his portion of the 1250 A/D. | |
| 24 October 2006 | |
| Regarding my prior post -- you can disregard. A spreadsheet that I had originally received from the p-ship CPA (which I believe may have been included with the p-ship tax return) clearly states that 2 members purchased the interest of 3 other memebers. The word purchased is there - so I still stick with my treatment as a sale. | |
| 25 October 2006 | |
| The legal contract states redemption of partnership interest paid by partnership not partners, shall I proceed with capital gain treatment? | |
| 25 October 2006 | |
| Good morning Solomon I would have to agree once you provided the cite I as they say did not read the next sentence. It just seemed a redemption would not be a recognized loophole and I had not spent alot of time other than my brief look at RIA to overcome my instinct that I wasnt correct. thanks bye | |
| 25 October 2006 | |
| Wes - See Checkpoint Practical Tax Strategies Vol. 67 Number 01 July 01, 2001 and Example 2 regarding redemptions. | |
| 25 October 2006 | |
| Hi actually my tax atty/manager found a good article this am on internet by Bruce N Edwards esg "Understanding and Using Partnershiop Redemptions in the Context of Section 1(h)" (22 pages) The downside is if you represent the remaining partners they need to be told they will pick the sellers share of 1250. bye | |
| 25 October 2006 | |
| Yeah - that is the BNA article I mentioned above. The RIA article shows the journal entries all the way through. | |
| 11 June 2008 | |
| Really don't want to sound stupid, but have not dealt w/this before, and I hope that someone will be willing to give a little guidance. Once again, I am finishing something that I did not start and the advice I have received is conflicting. We have client who has PS. PS owns building and receives rental income. There are 5 ptrs, husband, wife, and 3 others. In Feb, husband buys out the 3 other partners through loan in PS name. The buyout of the ptrs was for more than their adjusted capital accounts on the books. This transaction is recorded on the books, correct? With the amount being paid above and beyond capital of exiting ptrs recorded on the remaining ptrs capital accounts according to new share in PS, which in this case becomes 50/50. The contract calls this sale an "Assignment" of the partnership interests, and it was a cash transaction. Also, the remaining partners bought out the partners, as opposed to the PS buying out the ptrs, but the loan to do it was in the company name.
In June, then, the building is sold and the partnership is liquidated to the two remaining ptrs (husband and wife). No Sec 754 election was ever made. I am completing the 1065 and the 1040 for husband and wife. Final question, do the capital accounts on the K1s show an ending capital balance of zero for the partners that were bought out, or is this where the gain is shown? I hope that I have been articulate enough so that what I wrote makes sense!! The brain aches as the mind expands!! Tracey | |
RoyDaleOne (talk|edits) said: | 12 June 2008 |
| https://www.taxschool.uiuc.edu/products.html#LLC
This book is what you need. | |
| 12 June 2008 | |
| Thanks for the reference to the book - will probably purchase to use for future reference, but don't have time now to buy and read to get this return finished. I actually went back to my text books from school for help on the accounting issues. And I am fairly confident that the ending negative balance for the exiting prts K1s fairly represent their gain in their buyouts. However my problem here is that the contract for the buyout is partner to partner, but the funds for the buyout came in the form of a loan to the company. Messy... | |
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