buying an LLC, looking for advice

7 Replies

hey Bp, I have a question looking to get help with it.

I'm looking to buy an LLC that holds title to a piece of real estate. when the llc bought the property it was quit claim deeded for "0.00" If I buy the llc lets just say for 60k and sell it for 90k will I be taxed on 90k since the llc acquired the property for "0.00"?

No. You'll be taxed on the $30k gain. If you buy 100% of an LLC interest, in simple terms it is an asset sale, and the basis in the underlying assets will be stepped up to your purchase price. If you are buying a piece of this LLC, assuming the accountant doing the partnership return knows what they are doing, there will be a step up in basis allocated to you as well.

Not possible to answer...

How is the LLC taxed...disregarded entity, partnership, S Corp, C Corp...

Maybe if the LLC was taxed as a C Corp and no dividends were a return of basis, @Kory Reynolds would be correct, but that's a far reaching assumption based upon personal experience.

The bigger issue is -- should I be doing a stock/unit deal and buying the LLC, or should I be buying the assets and avoiding the off balance sheet liabilities, the contingencies, the unseen incubating lawsuits, etc.

Talk to your attorney.

Originally posted by @Eamonn McElroy :

Not possible to answer...

How is the LLC taxed...disregarded entity, partnership, S Corp, C Corp...

Maybe if the LLC was taxed as a C Corp and no dividends were a return of basis, @Kory Reynolds would be correct, but that's a far reaching assumption based upon personal experience.

The bigger issue is -- should I be doing a stock/unit deal and buying the LLC, or should I be buying the assets and avoiding the off balance sheet liabilities, the contingencies, the unseen incubating lawsuits, etc.

Talk to your attorney.

Not sure why I am only correct in such a narrow window, my assumption is that this is either a disregarded LLC, or, a partnership - the 99% likely scenarios. Even as an S-Corp you can structure this to get a basis step up. There are certainly ways to screw it up, but there is also a very wide avenue to achieve a basis step up in the underlying assets. I won't discuss CCorps as I spend very little time on that arena.

I will fully agree with talk to an attorney to help to draft up the paperwork properly depending on what situation you are in and what you are trying to accomplish - a different transaction structure such as a straight asset sale could be a better choice.

1) If the entity is formerly a partnership, now disregarded, rev rul 99-6 walks through the analysis that has us treat as an asset sale 

2) If the entity is formerly a partnership, still a partnership, 754 gives you an avenue to agree inside and outside basis

3) If the LLC was disregarded, and still disregarded, we also treat as an asset sale - the assets are treated for federal tax purposes as held directly by either party.

4) entity was disregarded and now a partnership - rev ruling 99-5 provides the mechanism for what is effectively a step up.

5) if it was formerly an SCorp, we can maintain SCorp status and run a 338(H)(10) transaction to achieve a step up in basis in the underlying assets.


What I was alluding to is that the example fact pattern (the C Corp) in my post is the only one in which we don't have basis fluctuation, so yes, $30k gain in that narrow fact pattern.

Outside of that, i.e. an LLC taxed as a disregarded entity, partnership, S Corp, all bets are off. We have basis fluctuation, even one year after the sale, and the potential gain or loss on a resale is likely no longer a positive $30k. In fact, it could be materially higher or lower depending on expensing and depreciation elections in year 1. That's what I was getting at. You're examining basis revaluation on day 1, but what happens after day 1?

Originally posted by @Eamonn McElroy :

What I was alluding to is that the example fact pattern (the C Corp) in my post is the only one in which we don't have basis fluctuation, so yes, $30k gain in that narrow fact pattern.

Outside of that, i.e. an LLC taxed as a disregarded entity, partnership, S Corp, all bets are off. We have basis fluctuation, even one year after the sale, and the potential gain or loss on a resale is likely no longer a positive $30k. In fact, it could be materially higher or lower depending on expensing and depreciation elections in year 1. That's what I was getting at. You're examining basis revaluation on day 1, but what happens after day 1?

Ah, I understand how you read into the question now - we are on the same page. After day 1 we are in no different position than of we had purchased the asset outright, which in my reading is the crux of the question. Certainly after day 1 there will be changes in basis for the activity of the entity, but that would be the same in either scenario (asset or equity purchase). Looking at this in a bubble with no other activity but this acquisition and sale, he isn't creating a problem for himself by executing in this manner. Future income/expenses and especially depreciation will certainly have an impact on future gains realized and recapture, but from a purchase transaction standpoint it is not a problem to execute in this manner, and it wouldn't create any future basis problems as a result of the execution as opposed to taking another route to purchase. There may be other reasons it is sub optimal, but from a tax standpoint, we are good to go.

thank you for the advice guys. I do not how the LLC is set up yet and only reason I wanted to buy the llc is because I didn't want to outright buy the property and then have to wait 90 days before it is eligible for a government loan.

only reason I wanted to buy the llc is because I didn't want to outright buy the property and then have to wait 90 days before it is eligible for a government loan.

You should really talk to an attorney about the pros of buying the assets vs buying the entity.

One absorbs a lot of risk by buying the entity for reasons already mentioned..  Good luck.