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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a question about installment sale method for LLC interests.

Customer Question

I have a question about installment sale method for LLC interests. An LLC interest is personal property which is an intangible. It can be sold on an installment sale basis for a note taken back. What if the LLC holds real estate that is dealer property? The real estate itself cannot be sold on an installment basis, but can the LLC interest? Does that make sense?
Submitted: 4 years ago.
Category: Tax
Expert:  Lev replied 4 years ago.

In case of asset's sale - each asset would be treated differently - as some may qualify for long term capital gain but others are not.

 

Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.

 

As you are selling your business using installments - the buyer will typically pay a down payment, and then the seller finance the rest so that the buyer will pay in installments over a period of time, determined in the sales agreement plus an interest.

The main benefits to installment sales is that this will generally bring a higher price than bank-financed sales, and the taxes can be reported over time as you receive payments allowing you to defer tax on capital gains.

But not all asset sales can be reported in installments - inventory or accounts receivable are not eligible for installment accounting - you should pay tax on these items within the year of making the sale, whether you have already received payment or not.

You will find reporting requirements and examples in the IRS publication 537 - http://www.irs.gov/pub/irs-pdf/p537.pdf

 

Let me know if you need any help.

 

Customer: replied 4 years ago.
You didn't answer my question. My question was, if I were to sell LLC membership interest which holds dealer real property for a note, can I treat the note on an installment sale basis since LLC interest is personal property, or the fact that the LLC holds dealer property disqualify me from using installment sale method. Please tell me about an LLC holding dealer property. Thank you.
Expert:  Lev replied 4 years ago.

You need to be very specific on what you own and what you are selling.

 

You wrote - The real estate itself cannot be sold on an installment basis - that is incorrect - the real estate may be sold using installments as a payment method.

Another issue is - if you are eligible to defer an income tax on capital gains over time as you receive payments. For instance - if the real property is a business or rental property - the tax may be defered, however if the real property is an inventory held specifically for resale - the tax liability is recognized in the year the property is sold regardless of the payment method.

 

If you are selling whole or partial interest in a LLC - the LLC will be resolved and the new owner(or owners) will register a new LLC - so you are actually selling assets owned by the LLC and should file the form 8594.

 

Customer: replied 4 years ago.
Let's try this one last time. What I am selling is LLC membership interest and what the LLC owns is a dealer real estate property held as inventory for resale. Thus, I said that the real estate itself cannot be sold on an installment basis because it's dealer property.

I think what you are saying is I need to file 8594 because it's actually the underlying assets that I am selling, i.e. the dealor real estate owned by the LLC and not the LLC membership interest itself. So, going back to my original questions, if I sell LLC membership interest, but it is treated as selling the assets owned by the LLC, and the assets owned by the LLC are ineligible for installment sale, is my sale of LLC membership interest also ineligible for installment sale? This is what I need to know.

Thank you.

Expert:  Lev replied 4 years ago.

I do not feel as I could help you.

I opt out from your question in hope that other experts will contribute.

Sorry for confusion.

 

 

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