Gain on Sale of LLC Interest & 1031 exchange

[smulekar]

A LLC member has a capital account of $30,000, & loan basis of $190,000. He is selling to other memeber of the LLC for $180,000 (cash) & assumption of loan.

Is the gain $150,000? Can the LLC member use 1031 exchange to defer the gain? The LLC owns real estate.

[Bees Knees]

You did not post enough for us to determine the gain on the transaction. Gain is the difference between the cash received and the taxpayer’s basis in the property given up. The capital account has nothing to do with determining the taxpayer’s basis. Also, what do you mean by loan basis? Is that direct loans the LLC member loaned to the LLC? Or are those the LLC members share of LLC liabilities? Gain or loss depends on whether the taxpayer is being relieved of LLC liabilities or not, or giving up a claim to LLC liabilities that are due to the taxpayer. So it is impossible for us to determine gain or loss based on facts you presented.

As to a 1031 like kind exchange, you cannot exchange a partnership interest tax-free in a like kind exchange. [Code Section 1031(a)(2)(D)]

[jainen]

The corporation could do a 1031 exchange (if the real estate is non-inventory investment or business property), but the shareholder's ownership interests are not eligible for 1031 treatment.

[smulekar]

can you provide info regarding computing gain on sale of LLC interest? The member is being relieved of LLC liabilities. The members share of LLC liabilities is $190,000.

[Bees Knees]

If the LLC member is being relieved of $190,000 of liabilities, and will also receive $180,000 cash, then you have him with gross proceeds from the sale at $370,000. Minus his basis, and you have your gain.

I question, however, how the LLC member would be liable for the loan in the first place. Unless there is a personal guarantee, LLC members normally are not liable for the debt of the LLC. That’s why its called an LLC.