Buying partner's share of apartment building & limit income tax

3 Replies

I own a multi-unit apartment building with my parents and they are looking to sell their share. I purchased their partner's share about 15 years ago. They have owned it almost 30 years and their accountant is recommending converting to LLC first and me purchasing their shares to reduce their tax burden. According to him conversion will be at today's value, I would purchase shares from them over agreed number of years. They would not have to pay recapture tax. Would their benefit today have tax consequences for me when I go to sell?

Original purchase $250 (their share fully depreciated), today's value $500

Originally posted by @Maria Zielinski :

I own a multi-unit apartment building with my parents and they are looking to sell their share. I purchased their partner's share about 15 years ago. They have owned it almost 30 years and their accountant is recommending converting to LLC first and me purchasing their shares to reduce their tax burden. According to him conversion will be at today's value, I would purchase shares from them over agreed number of years. They would not have to pay recapture tax. Would their benefit today have tax consequences for me when I go to sell?

Original purchase $250 (their share fully depreciated), today's value $500

Please read more on Asset sale vs Stock sale. 

Yes, their benefit will impact you when you sell the asset in the future. 

Also, there are not shares on LLC. He must be talking about corps.

You need to carefully plan this transaction as it has can have huge tax impact on your end. 

Based on this...seems like a short sighted plan. If you create a standard LLC /partnership, you alleviate absolutely no tax. Property contributed to an LLC retains it's original basis to that partner,and their basis in the partnership will equal the basis of the property contributed. The sale of that LLC interest requires the selling member to look through to the underlying assets and recognize their share of recapture.

If we were talking about converting to Ccorps... Assuming we were able to get through all the steps and get the asset into the CCorp. Now on any income of this newly formed CCorp, you are taxed at 21%, and pay another 15-23.8% on any dollar distributed as dividends. As you buy out your father, yeah he only has capital gain tax, but then you only hold a stepped up basis in stock. Why is this an issue? 1) you don't get to depreciate anything for all the money spent 2) when you sell the property all your basis will be in the stock, not in the property. You'll recognize a large gain paid at CCorp tax rates, distribute those funds and pay a tax on the dividends. Then you'll be left holding stock with large basis, which you'll write off as a capital loss, and write off at $3,000 until you incur enough other capital gains to absorb it.

Another option would be SCorp, also a bad result for you for a number of similar reasons to above, other than the CCorp tax rates - you get no basis in the purchased property, and would have the same very significant tax issues upon disposal.

All in all...yeah this works great for your Dad, but instead of him paying the tax you get hit much harder than he ever would have.

Agree with @Kory Reynolds .

Generally not a good idea to put rental real estate inside of a corporate tax entity.

You should get a second (and ideally independent) opinion to contrast with your parent's CPA.  Ask if an installment sale will work and be the most optimal way to achieve both your and your father's goals.