Getting inherited properties out of an LLC while minimizing taxes

8 Replies

My sister and I inherited free and clear rental properties that are held in an LLC. We are starting down the path of distributing the properties, and we are concerned about the tax consequences of dividing up the properties. Specifically, how best can we minimize or alleviate capital gains on the properties as they exit the entity?

Keeping the entity intact and co-owning the entity is not an option.  We do not see eye-to-eye.

We can pay taxes now and then depreciate the properties (again), but we are hoping to find a better option.

TIA,

Sam

Talk to a CPA, but I assume your basis is "fair market value" at the time of inheritance, so there may be no cap gains, or little.  More details would be needed, and maybe @Steven Hamilton II  can help.

Originally posted by @Wayne Brooks :

Talk to a CPA, but I assume your basis is "fair market value" at the time of inheritance, so there may be no cap gains, or little.  More details would be needed, and maybe @Steven Hamilton II  can help.

First of all, thank you!

I don't know that there is a distinction, but I guess I am not actually inheriting the properties. I am inheriting ownership in an LLC that we are forced to dissolve because we have differing goals, objectives, experiences, etc. The LLC is wholly comprised of the properties, so while I am inheriting properties (as stated in the subject line), that might not be the best phrasing. I do not know that the distinction is relevant, though.

Ultimately, I guess I am trying to figure out how to dissolve an inherited LLC that owns properties without incurring taxes on the properties. Maybe that is the best phrasin.

Basically, this is a dissolution of an entity matter. 

There are a number of option, however it will probably require liquidation of at least half the assets in order to facilitate a buyout between two LLC members.

This is definitely a matter for a CPA with plenty of real estate experience. Maybe it's possible to 1031 exchange out and replace with other income property. 

Too tricky and potentially expensive errors to rely on free BP advise. 

"Too tricky and potentially expensive errors to rely on free BP advise."

In all honesty, that may be the best advice I get - LOL. 

Yes, I agree that free advice can be very costly, but as much as anything, I was just looking for a starting point.  In drafting these responses, one thing that came to mind, and that would be the possibility of me buying the other intrests in the entity.  That's a big swing, but it might address th tax issues.

Maybe you could refinance the properties to free up enough cash to buy the other out?

I would meet with your lawyer which you will probably have to do dissolve an LLC anyway and your CPA and come up with a solution.

Originally posted by @Sam Elder :

My sister and I inherited free and clear rental properties that are held in an LLC. We are starting down the path of distributing the properties, and we are concerned about the tax consequences of dividing up the properties. Specifically, how best can we minimize or alleviate capital gains on the properties as they exit the entity?

Keeping the entity intact and co-owning the entity is not an option.  We do not see eye-to-eye.

We can pay taxes now and then depreciate the properties (again), but we are hoping to find a better option.

TIA,

Sam

 Is the property the only asset?
Your BASIS in the LLC is the FMV of your share. That means if it was the same day you could pull it right out with no consequence.
Either way there is a step up in basis on your ownership of the entity.
Therefore if property is the only asset and it's FMV was 200k at date of death you can pull up to 100k (Your share) in cash or property out of the entity with no tax consequence unless there has been an increase in value.

Feel free to PM me if you want specific answers.

Originally posted by @Steven Hamilton II :

 Is the property the only asset?
Your BASIS in the LLC is the FMV of your share. That means if it was the same day you could pull it right out with no consequence.
Either way there is a step up in basis on your ownership of the entity.
Therefore if property is the only asset and it's FMV was 200k at date of death you can pull up to 100k (Your share) in cash or property out of the entity with no tax consequence unless there has been an increase in value.

Feel free to PM me if you want specific answers.

 Thank you for the helpful insight!

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