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I hold six rental properties with my sister (50/50) that we…

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I hold six rental...

I hold six rental properties with my sister (50/50) that we purchased via a 1031 exchange in 2013 after inheriting the family home. The properties are in three different LLCs (two each) in California. We are the only members of the LLCs, which we operate together. We want to make an equitable trade/split of the properties, keeping two properties in an LLC we will continue to operate together. We want to transfer properties between the other two LLCs by the end of this year (two each) to make the other two LLCs have equal value. Then we want to change the operating agreement of the LLCs in 2018 to reflect individual ownership of the respective LLCs. My question: What are tax consequences of simply transferring properties between the LLCs and then ultimately changing the ownsership of the LLCs? Jon

Accountant's Assistant: Can you tell me what state the LLC is registered in?

All three in california

Accountant's Assistant: Has anything been filed or reported?

Not yet

Accountant's Assistant: Anything else you want the lawyer to know before I connect you?

Not if you understand my questions.

Submitted: 7 months ago.Category: Tax
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Answered in 34 minutes by:
11/28/2017
Tax Professional: Lev, Tax Advisor replied 7 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,141
Experience: Taxes, Immigration, Labor Relations
Verified

Hi Jon,

For income tax prospective - the LLC with two members is classified as a partnership.

Each LLC is a separate legal entity and correspondingly - separate LLC.

When you transfer the property from one LLC to another - that is treated as two-steps transaction - (1)distribution of the property from the partnership to the partners and (2)partners are contributing the property to another partnership.

The fair market value if the property is reported as distribution.

The distribution is tax free - but the basis is reduced by the amount distributed.

When the basis is reduced to zero - any additional distribution is reported as capital gain.

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Tax Professional: Lev, Tax Advisor replied 7 months ago

Another issue if you want to change the ownership from two member LLC to one member.

That actually classified as a dissolution of the partnership and ALL assets are treated as distributed to partners.

Let me know if you need any help with reporting.

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