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Lev
Lev, Tax Advisor
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We are members in an LLC that owns lots in Hawaii. Our ownership

Customer Question

We are members in an LLC that owns lots in Hawaii. Our ownership interest is approximately 10%. Our share of the LLC’s liabilities is approximately $534,000. Our previous capital contributions were about $221,000. We have tentatively agreed that we will pay our share of the liabilities and take 3 lots free and clear. The lots fair market value is approximately equal to the total of our capital contributions plus the $534,000 in additional money we are paying.
The LLC has proposed that we contribute the $534,000 to the LLC and they will distribute the lots to us with the net result that we are no longer members of the LLC. The questions we need answered are:
1. Is there any tax consequence us in the initial transaction in which we contribute the $534,000 and the lots are distributed to us in exchange for our interest in the LLC?
2. What is our tax basis in the lots?
Submitted: 4 years ago.
Category: Tax
Expert:  Lev replied 4 years ago.

Section 731(a)(1) provides that, in the case of a distribution by a partnership to a partner, gain is not recognized to the partner except to the extent that any money distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution.

See for reference - http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000731----000-.html

So far - there is no taxable income on the distribution in your situation.

Section 732(b) provides that the basis of property (other than money) distributed by a partnership to a partner in liquidation of the partner's interest shall be an amount equal to the adjusted basis of the partner's interest in the partnership, reduced by any money distributed in the same transaction.

See for reference - http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000732----000-.html

So your basis in the lots is $534,000

 

Let me know if you need any help.

 



Edited by LEV on 2/1/2010 at 2:13 PM EST

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