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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7119
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I recently closed a small business. I had one partner in the

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I recently closed a small business. I had one partner in the business. When we closed, I owed him $100,000 for capital he had put into the day to day operations of the business (We were a 50/50 partnership and he had put in $200000). I was unable to pay him at the time. However, I now own a piece of real property that I purchased for $40000, but is appraised at $100000. If I transfer title of the property to him in exchange for forgiveness of the debt, will either one of us incur federal tax liability. If so, how much?

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.


 

Stephen E. Grizey :

When you say YOU owed him $100,000., how did you operate this "partnership"? If you were 50/50 "partners", did you report this business activity as a partnership for tax purposes? Please explain how you would owe him $100,000. personally.


 

Stephen E. Grizey :

It will affect the tax treatment.


 

Customer:

We were a LLC, but reported as a partnership for federal tax purposes. I agreed to pay him the $100000 after we closed because I had been unable to contribute capital to the business. He was essentially bankrolling the operation. I just contributed a lot of sweat equity.

Stephen E. Grizey :

OK, I'll presume all the accounting was done properly for the partnership & essentially you owed him $100,000. for your share of the initial capital that he contributed on your behalf.


 

Customer:

OK.

Stephen E. Grizey :

That being the case, if you were to satisfy your debt obligation by transferring the real property to him, in 2012, you would have a capital gain of $60,000. on the exchange of the real property for your debt. The classification of the gain between long & short term would depend upon the length of time you owned the real estate when you make the transfer.


 

Customer:

I've owned the property for two years. Is the capital gains rate 15%?

Stephen E. Grizey :

You "partner" would not have any gain or loss on the transaction. For him, it would be the same thing as purchasing the property for the $100,000. that was advanced on your behalf.


 

Stephen E. Grizey :

You tax on the capital gain would be long-term & the actual tax would depend upon the amount of your other taxable income, but would be at a maximum rate of 15%.


 

Stephen E. Grizey :

Plus any state taxes depending upon your state of residence & the location of the real estate.


 

Customer:

Thanks so much! You answered exactly what I needed to know.

Stephen E. Grizey :

OK


 

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