Tax Treatment Of LLC And Real Estate Sale
I am a 20% member of a Nevada LLC.
The other 4 members are forcing the sale of the property and claiming that I will only be subject to capital gains taxes.
My CPA has told me that I will receive the income as ordinary income, and because I live in CA will be subject to ordinary income on the sale as well. As I understand it I stand to lose about 45% on this sale. Does anyone have any suggestions on how to avoid this huge tax hit?
Thanks,
Mountain28 :-?
The definition of capital gains is based on the hold period for the investment. Are you saying that the LLC held the property less then a year so the taxes are considered ordinary income?
Do the other partners in the LLC agree with your CPA? If not, could it be that they are looking at large tax bills also but do not know it yet? If so, have you tried to clarify this with them as they might think differently about the sale in that case?
Your CA tax bill tends to follow the line taken on the Federal return so if capital gains or if ordinary income then the CA rates for one or the other apply.
John
[addsig]
John,
The holding period has been since 1994. The way my CPA explained it was that the LLC is treated like another entity (person) and all proceeds will come to me as ordinary income on a K1. I have repeatedly stated that I wish to 1031 exchange my share but cannot see how this could be done unless we hold the property in our separate names for 2 tax years. It was suggested that I 1031 within the LLC but then I will still have the same 2 year holding restrictions.
Mountain28
cjmazur,
Thanks, I am reviewing the operating agreement and it looks very slippery to me. One clause states that no member should do any act that would make it impossible to carry on the ordinary business of the company. This LLC has 2 other properties one of which is another LLC, and the other is raw land. So the sale of this property will really curtail the business of the company quite a bit. I don't know about the Buy/Sell clause. I will keep reading. Apologies for the dual PM
Mountain 28