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Hi, my name is Mark. I will be happy to help you with your question. What type of entity is being sold (LLC, S-Corporation, C-Corporation)?
What kind of business is being sold? Do you have inventory?
With a sale of an LLC interest there is likely to be ordinary income for any hot assets. Hot assets would include any receivables if the LLC was reporting on a cash basis, the gain on inventory if the Fair Market Value is greater than 120% of the carrying cost, and potential depreciation recapture.
Do you know what your basis in the LLC is? Do know what the value of your capital account was?
Unfortunately there is no way to avoid paying taxes on the transaction. The sale of an LLC interest is a bit more complicated than the sale of a corporate interest. With a corporation your basis is what you purchased the shares for. Let's assume an individual bought the shares for $20,000 and sold the shares 3 years later for $40,000. You clearly have a $20,000 long term capital gain ($40,000 less $20,000). With an LLC you would need to considered the tax treatment of certain assets at the time of the sale. As I mentioned some of these assets are unrealized receivables, appreciated inventory, and depreciation recapture.
So the business sold for $1 million. Most likely the tax returns were filed on an accrual basis so there probably will not be any unrealized receivables. When the business is sold it is as if all the assets are sold for their fair market value. So if there was $300,000 in inventory that has a fair market value of $360,000. There is an ordinary gain of $60,000. Your share would be 4% of this amount. If there is any equipment or real property this is the potential for depreciation recapture. I understand your confusion but an the sale of an LLC is much more complex than the difference between the purchase and sales price of your interest.
On this transaction you will likely have some ordinary income and potentially a capital gain or capital loss.
Do you know if the LLC was treated as a partnership?