Tax Considerations for Limited Partnership w/ Seller

Tax Considerations for Limited Partnership w/ Seller

Rental Property Investor · Manchester, NH · Member since 2017 · 45 posts · 51 votes

I am in talks with a multi-family owner who would like to sell me his property, but stay on as a 20% owner as I re-position it over a 2-year period. This raises some tax questions for me. This property is in New Hampshire, is owned in an LLC, and has been fully depreciated after almost 40 years without changing hands.

In New Hampshire, there is a 1.50% transfer tax split 50-50 by buyer and seller that is charged to all sales of real estate. If I buy the property from a newly created LLC in which I was an 80% owner and the seller was an 20% owner, we would be subject to this tax without question. However, I am wondering whether we avoid the transfer tax if I simply buy an 80% stake in the LLC that already owns the property. Is that the case?

If I do purchase an 80% stake in the currently existing LLC, is the 27.5 year depreciation schedule reset for both myself and the seller?

Whether a new LLC is created or not, how is the seller's capital gain treated? He is reaping a large capital gain after ~40 years of ownership and then re-investing about 10% of it back into the property. Are those re-invested funds eligible for a 1031 exchange?

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @Nick Gray

    You may want to discuss 754 election with your accountant. I am not 100% sure it would work in this instance but it is worth discussing with him.

  • Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    @Nick Gray

    Most attorneys worth their salt will tell you to avoid purchasing units in the existing LLC. You're buying into the unknown...off balance sheet liabilities, future lawsuits for past occurrences that are currently off radar, other unfavorable contingencies. One reason that almost all business sales now-a-days are structured as asset sales, not entity sales.

    If you do buy into his LLC, assuming it's disregarded for federal income tax purposes, we treat it like this: (1) an asset sale to the existing holder, the buyer obtains an undivided interest in the LLC assets and simultaneously (2) the buyer and seller (members) are deemed to contribute of each of their undivided interests in the LLC assets and liabilities into a newly formed partnership tax entity.

    There isn't a 754 election available in this situation, as a partnership interest was not what was sold for tax purposes. We do have to contend with forward 704(c) allocations however due to the disparity of the original holder's tax basis in the assets vs FMV at the time of formation of the partnership.

    You'll want to speak with your attorney and CPA.  Lots to consider here.  A few different ways to structure it.  Both you and the seller should seek independent advice.

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