Discussion:Sale of partnership interest - Ordinary loss under Sec 751
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Discussion Forum Index --> Advanced Tax Questions --> Sale of partnership interest - Ordinary loss under Sec 751
Discussion Forum Index --> Tax Questions --> Sale of partnership interest - Ordinary loss under Sec 751
| December 10, 2008 | |
| LLC taxed as partnership organized for the sole purpose of developing commercial building for resale. Therefore, income from sale of building would be taxed as ordinary. Due to current economy, the building is now worth less than the construction loan and less than the LLC's basis in the land and construction costs. LLC is currently in discussions with bank, resolution (foreclosure) will not occur until 2009.
Some members of LLC wish to recognize loss in 2008, by selling their interest for $1 to managing-member. Would the underlying assets of LLC be considered hot assets (inventory) thereby requiring the collapsible partnership provisions of Section 751(b)? And therefore, would the selling partners be allowed an ordinary loss for the sale of their partnership interest? | |
RoyDaleOne (talk|edits) said: | 10 December 2008 |
| Tell me a again, how you are going to generate a loss?
Is Qualified Real Property Business Indebtedness a factor? | |
| December 10, 2008 | |
| The partner has a loss by way of selling their interest for a $1 while their basis in their partnership interest is say $50,000.
Yes. The loss at the LLC level would be the non-recourse financing indebtedness less the basis in the building. Or in other words, the LLC's loss is equal to the sum of the LLC's member's capital balances. Therefore, at the member-level, each member has a loss equal to their capital balance. | |
RoyDaleOne (talk|edits) said: | 10 December 2008 |
| I see, there is no realized loss at this point in time. | |
| December 10, 2008 | |
| Yes, the LLC has not yet realized the loss. But a few of the members wish to realize their loss this year by selling their interest. I want to confirm that the loss on the sale of their partnership interest this year will not be a capital loss. | |
RoyDaleOne (talk|edits) said: | 10 December 2008 |
Stock in trade of the partnership, or other
property of a kind which would properly be included in
the inventory of the partnership if on hand at the
close of the taxable year, or property held by the
partnership primarily for sale to customers in the
ordinary course of its trade or business
If you would conclude that the building would be property held in the ordinary course of business for sale to customers, and if, such sale would produce ordinary income. See Reg Sec 1.751-1(d)(2). I am not sure what you are going to do now. I think I got that correct. | |
