Selling “Basis” portion of property to a partner

5 Replies

When selling a portion of a property to a partner, is it possible to sell the “basis” value portion of my property and not the “capital gain” portion such that I don’t incur capital gains taxes upon sale?

When selling stocks it’s possible adjust whether selling older or newer shares (first in-last out or first in-first out) so one can effectively choose to sell shares that have more or less capital gain associated. Curious if real estate tax rules have similar flexibility.

Any guidance would be greatly appreciated. Thanks in advance for any help or suggestions!

Hey Nick

I'm not a tax professional so you will want to also hear from the good professionals on here.

From what I've read it shouldn't be an issue if you're in a partnership and you want your partner to buy you out at your basis. From what I've read this doesn't usually create tax but you do have to determine what your basis is, as it may or may not be cut and dry as it sounds. 

Why would you want to do this? It almost seems like it defeats the purpose of investing in the first place.

If you're trying to do this as a gift you may run into the issue of a bargain sale.

Also, depending on your situation and further details could change the answer.

Would love for any of the professionals to let me know if they agree or disagree!

Originally posted by @Nick Drury:

When selling a portion of a property to a partner, is it possible to sell the “basis” value portion of my property and not the “capital gain” portion such that I don’t incur capital gains taxes upon sale?

When selling stocks it’s possible adjust whether selling older or newer shares (first in-last out or first in-first out) so one can effectively choose to sell shares that have more or less capital gain associated. Curious if real estate tax rules have similar flexibility.

Any guidance would be greatly appreciated. Thanks in advance for any help or suggestions!

No you can’t just sell the basis portion of your property to avoid gain. 

If you create a partnership with a partner and contribute your property, then your partner contributes the same amount as your property to the partnership, there will be no tax consequences, generally. 

There are other ways to get into the partnership and not trigger tax when contributing property, but this might not be a what you are looking for as you might want 50-50 partnership in equity and profit interest. 

Talking to a professional with more detail is recommended. 

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@Ashish Acharya

"If you create a partnership with a partner and contribute your property, then your partner contributes the same amount as your property to the partnership, there will be no tax consequences, generally."

Agree.  This may run into the area of sham transaction if the cash is then distributed to OP -- but -- that really requires a conversation and planning.

Originally posted by @Eamonn McElroy:

@Ashish Acharya

"If you create a partnership with a partner and contribute your property, then your partner contributes the same amount as your property to the partnership, there will be no tax consequences, generally."

Disguised sale under 704(c)?

Nope, there is no distribution to the contributing partner. I just meant let's create a partnership with the other partner contributing the equal value of cash, so just like a new partnership with cash and property contribution.  That way there is no gain recognition for a partner that has a property. This is one of the simple methods and depends if another partner can or wants to fund the partnership.

There are a number of anti-abuse provisions within the partnership section of the tax code (sub K) that you would need to address (e.g., disguised sale rules, etc.), not to mention some additional general anti-abuse rules outside sub K. Your suggestion sounds a bit obvious, so I would not count on it passing muster as described.