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We currently have two Members in an LLC. The LLC is taxed as…

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We currently have two...

We currently have two Members in an LLC. The LLC is taxed as a partnership. Member 1 owns 70% and Member 2 owns 30%. We are wanting to sale 5% of our ownership to a new Member. Member 1 will sell 3.5% and Member 2 will sell 1.5%. Do we have to sell our units directly to the new Member and pay capital gains tax on the difference from our basis versus sale price or can we redeem the member units, cash out our equity for those units and then have the LLC issue the 5% to the new Member at book value even though the new Member will pay substantially more than book value the ultimately will become their initial basis?

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

None that I know.

Submitted: 4 months ago.Category: Tax
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Answered in 3 hours by:
12/23/2017
Tax Professional: Lev, Tax Advisor replied 4 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,697
Experience: Taxes, Immigration, Labor Relations
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You may do either way.

The first option as you suggested - existing partners may sell some percentage of their partnership interest - and report that sale transaction on individual tax returns.

Another option would be to accept the third partner, and that partner will make contribution directly to the partnership.

In any case - the amount paid by that third partner will become his/her basis.

If existing members will take additional distribution - that distribution will NOT be taxable but will reduce the basis in partnership interest.

After the basis is reduced to zero - any additional distribution is taxed as capital gain.

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