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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 14416
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Client is a memeber of LLC that has qualified non-recourse

Resolved Question:

Client is a memeber of LLC that has qualified non-recourse debt. His share of that debt is 1.5 million and his capital account is negative 718,000. He is being offered a buyout of 338,000 in installment over 7 years and his share of the debt be forgiven.

What would gain be?
Submitted: 11 months ago.
Category: Finance
Expert:  Megan C replied 11 months ago.

Megan C :

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Megan C :

In this situation with the negative capital account, you would recognize a gain in the amount of $718,000. Added to that would be the forgiveness of liability of $1.5 million and then on top of that, the $338,000 received.

Megan C :

This would be $2,556,000

Megan C :

This should be a capital gain, as well.

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Expert:  Megan C replied 11 months ago.
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Expert:  Megan C replied 11 months ago.
Ron,

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Customer: replied 11 months ago.

Hi Megan.


 


Since it's qualified non-recourse financing....wouldn't his basis increase by that amount and then be reduced by the 718,000 in losses? which leaves a 782,000 basis? That's the part I was confused on. Since the negative basis came from him taking the losses due to the debt basis.


 

Expert:  Megan C replied 11 months ago.
Actually I did more research this morning and gain would, of course, depend on what his basis is. Grossly simplifying the calculation: Proceeds would be $1,838,000 ($1,500,000 + 338,000); Basis may be $782,000 ($1,500,000 debt basis - 718,000 net losses/distributions against debt basis)= $1,056,000 net income. Character of income depends upon mix of underlying assets.

 

The possibility exists he could have more tax in year one than cash received from the buyout.

 

Hope this helps. Let me know if you need further clarification. If not, please rate as 'excellent' so that I may receive credit for assisting you today.

Customer: replied 11 months ago.


Can you explain the character of income? I thought since he was selling his interest it would be subject to cpaital gains. Would there be recapture?

Expert:  Megan C replied 11 months ago.
No it should be capital. Character would differ if selling assets. But with the buyout it would be capital

Sorry for any confusion. Thanks and don't forget to rate as excellent so that I may receive credit for assisting today.
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 14416
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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