1031 ? One Partner Wants To Cash Out and Pay Tax

7 Replies

I am a 1/3 member of an llc, with 2 other 1/3 members, that own 3 properties inside the LLC. I would like to get my investment back and pay taxes (i have losses I can apply). The other 2 members would like to keep their tax deferrance continuing, how might one proceed?

A couple thoughts I had was we could do a refinance, and then with the money they could buy out my ownership in the LLC.

The other would be sell, exchange, refinance, and buy out my ownership.  Currently the properties are owned with no debt in place.

@Neal Salmen I have seen situations like this where partners of an LLC can go their separate ways if they do what's called a "drop and swap". You might wanna check with your real estate attorney on that. Hope this is helpful! 👍

@Neal Salmen . either one of those two tracks would be workable.  the biggest problem is that they would leave the other two with significantly higher reinvestment requirements in a 1031.

Three properties - three members???  I don't suppose that one of those properties is close to the value of your investment and is one you wouldn't mind owning?

If that were the case then they could buy out your membership interest for the property. It's very possible that could be done without a taxable event as you have a capital account in the LLC and the property may offset the capital account. So at the end of that transaction there is an LLC that owns two properties with unrecognized gain and you are an individual with one property that has unrecognized gain.

Then they could hold or sell and 1031 as the LLC wants. And you can hold or sell and pay tax.

When done this way they only have the reinvestment requirements for the two and they do not have to worry about a refinance to get cash to buy you out and then worry about debt replacement on a 1031 as well.

Hey Dave, thanks for the input.  I was thinking the same thing.  1 property is ~350K ` 1 property is ~1.2mm and the 3rd is ~ 2.1mm.  

I was thinking the 1 that is 1.2mm is very close to my interest.  My capital account is ~600K in the entity, the property its about 200k.

So how would that work, they "buy" me out by retitling the property to me personally and then taking over my llc interests which now owns the other two properties outright? that would be taxable then to them? or rather could we swap and issue me TIC interst in that property for say 98% and the llc still holds 2% and then the property sells? The property should be sold within 4 months fyi.

@Neal Salmen , Get your accountant to confirm. But I think that in a distribution like that you would get your capital account to 0 without a tax event. the remaining would be. Not sure if there's any other basis considerations there. But the LLC is buying so gain should be attributed to you in the partnership return.

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