Purchase 3-unit from Business Partner (Buyout and Capital Gains Tax Liability)

[Quincy Mingo]

I own a 3-unit multi-family with a business partner. The mortgage is in the name of my business partner. The interest rate is 4.5. We put 5% down when we first purchased it in 2019. The loan is not assumable. I want to get the mortgage in my name and buy out my business partner. The current owed amount on the property is $407,000. The current market value is roughly $600,000. We have an Operating Agreement, that states I can buy him out.

Reasons for the buyout

• Business partner wants out of real estate
• To put the mortgage in my name and renovate to have as a primary residence
• Low Cost purchase of the multi-family over buying anything on the current market.

Possible Solutions I See

• Purchase the property from my partner with a new mortgage:
  • My interest rate would be market, anywhere from 6.5 – 7.5% rate for primary residence either using FHA, Conventional, 203K. Purchase price would be the current owed amount on the property. If possible, not use an agent, to lower commission owed expense (not sure if this is possible in Chicago, IL). From a purchase and tax standpoint, I would operate the business expenses as usual in the name of the LLC as previously done. Buyout my business partner with an agreed upon amount soon after the closing and change LLC to single member. Next year file taxes for the LLC with it now being a single member LLC. This is so neither of us would have to pay capital gains on the sale since it actually stayed as a property for the LLC, my business partner was just bought out. I would dissolve the LLC the year after the property purchase is seen on the return.

Please share thoughts about my idea and if there are better alternatives or details I am missing. I am working with my accountant and CPA to ensure this works and the have suggested this path forward.

[Joshua Christensen]

Quote from @Quincy Mingo:

Quote from @Joshua Christensen:

The issue of purchase vs. refi isn't so much about who's name the loan is in. What is the ownership on the deed recorded at the county? Is it the LLC or is it in your partner's name?

One person can get a loan but title of the property is owned by an LLC and that's the issue on how to go about transferring ownership. The tax implications of your partner's shares are determined by his percentage of ownership of the property.

If the property is deeded 100% in his name,  You have a couple of options.

1. have your name added to the title/deed at the county and perform a refinance or a 2nd position private note as previously discussed

2. Do a full on purchase at a discounted value based on your retained equity.  You don't need a Real Estate pro to do that.  You just need a purchase agreement between the two of you with clear terms that either an attorney can draft or you may be able to find an off the shelf generic one (I never recommend these as they are too generic and don't protect either party), or you can ask a broker to prepare one for a flat fee.  

The property is in the name of my business partner therefore Title and Deed in his name. We have operating agreement and Joint Venture agreement but and connection for the LLC to the property is that we operate our entire finances through accounts setup by the LLC. We also process tax returns for the LLC with the income and expenses for the property.

If I add my name to the title at the county, then I can refinance the property in my own name only? 

Be sure to check with your lender to see what the specs will be, and yes I believe that is true.  I've heard there may be some seasoning requirements after you're added to title anywhere from 3-6 months before they will allow cash out to buy him out.  Your lender will know how to handle that.