Bought Building under LLC - Dividing the shares afterwards?

Question

Hi

Bought a 2mil buidling last year with family members under a Limited Liability Co. and I am looking to sell "shares" of the LLC to another family member who wants in.

So 'cash out' a bit, if you will.

What are some issues with this?

Any special procedures that I need to go through other than just registering different shareholders for the company?

Bill Exeter · Answer

@Leon D.  brings up an excellent point.  Partners often want to sell and go their separate ways later in life.  However, if the partnership (LLC) is selling the real estate (not the partners) then the individual partners can not 1031 Exchange their individual interests into other property.

I would careful think about what your ultimate exit strategy will be and then meet with your legal and tax advisors to determine what ownership structure would best meet your goals and objectives.

Steven Hamilton II · Answer

The second scenario is if you are selling additional shares of the LLC.

That will be more complicated and will be a bit of an accounting work.  Very much the same principal of changing everyone's percentage as of that specific date.

Brian Kelsch · Answer

Well put @Steven Hamilton II assuming he is selling his interest in the LLC. Just wanted to make sure these were the facts. Congrats on the cash out @Reginald Marquardt.

Steven Hamilton II · Answer

@Reginald Marquardt ,

Seems they did not understand your question..
	
	You want to dispose of some of your shares to another family member by selling them for cash.

The entity is not issuing new shares correct?

That is simple. You WILL have a taxable transaction. You will have capital gain/loss on your shares. That is why accountants such as myself preach BASIS.
	
	Basis is what your investment into property or stock or other asset consists. I.E. I bought Microsoft 20 years ago for $10 / share. My basis is $10 a share unless it has split. But we will avoid that part for today's discussion.  In a partnership your basis goes up if there is profit and down if there is a loss.

Lets say your investment into the LLC was $100k and you have not put any other funds in or taken any out, and it broke even every year.  Your basis is $100k in your 100 shares. That means $1k per share. If you sell it to family for 900/share you will have a loss of 100 per share; however, it may not be deductible due to related party sales. On the other side if it is for $1,100 per share you would have a gain of $100 per share.  You MUST sell at fair market value.

Yes, a new shareholder will have to be registered. Unless it is effective 1/1/14 a profit and loss should be prepared as of that date for the accountant to prepare your K-1 to allocate gain/loss properly before and after the percentage change.

Feel free to ask if you need clarification.

Brian Kelsch · Answer

You stated it was an LLC but then mentioned shareholders? is it a partnership or corporation?

Is the entity diluting others interest? Creating new "shares"? is one personal selling of some of their "shares"?

You have to consider if this sale will be inside or outside the entity?

Chris Winterhalter · Answer

@Reginald Marquardt

I just went through a buy out with a business partner on one of my LLC's that held real estate.  @William T. is correct you will need a good real estate attorney to handle all the documents.  You will also need to speak with a CPA who understands these types of transactions to talk about the tax implications involved.  Was the LLC formed in the same state you own the real estate?  If you have an LLC formed in one state and own property in another state you may need to speak with a CPA that understands both areas (Or two CPA's).  You will also need to bring this up with the attorney.  I would start with an attorney that is local to your LLC.  The lawyer will more than likely set up a membership purchase agreement, handle any amendments to articles and operating agreements, assignment of interest, and any other items that need to be handled.  You need to make sure there are no transfer tax issues within the LLC.  The seller will be taxed on the sale above his basis amount as well (generally).

I think it is extremely important to paint a very clear picture of the entire entity and deal structure especially if you are using an attorney and CPA that are not familiar with your business.

Good luck!

*Please note I am not a lawyer or CPA and am by no means offering advice.

William T. · Answer

I would see a real estate attorney on this question because of any legal or tax issues.  It is better to be safe than sorry and you will eventually need an attorney to be part of your REI team.  Congrats on the investment....