Cashing out a Partner

[Nick Dame]

Hey all, thanks in advance for the guidance.

Here is the situation. My partner and I own a rental property in Missouri under an LLC based in Nevada. I am in California. He wants to cash out but we have a large capital gain that I do not want to realize. Our operating agreement does not spell out what to do in this scenario. Questions:

How do we account for cap gains taxes if I buy him out with a cash refi?   Place his share of tax burden on him at the sale?

Should we Quit Claim the property back to us first or buy the LLC interest? The mortgage is in our names, not the LLC.

Can I sell another property and do a 1031 exchange with the proceeds to buy his share of the LLC?

Are there any real estate focused CPA's in the San Diego area that could assist me?

[Katie L.]

@Nick Dame

You've asked a lot of good questions and what you are proposing is actually pretty complex with a lot of moving pieces.  I know several professionals in San Diego I can give you the names if you PM me.  I won't comment in detail on your questions, one, because it would take too long to give you the answers you're looking for, and two, I don't know the whole situation here and details.  You would be very wise to seek out counsel from a competent professional about all these questions.

Regarding taxes: I've done several agreements before where we specifically lay out who will be shouldering the costs of taxes and we put a dollar figure on it ahead of time after running calculations.  Depends what you both agree and what you feel is fair.

Regarding logistics going forward: If you're going from two members in the LLC down to one, you will now have a single member LLC, which doesn't necessarily require the filing of a partnership tax return going forward. If you are married since you are in California and you want to keep the partnership return going, you can choose to have you and your spouse treated as separate partners (or as one partner to not file a partnership tax return, the benefits of a community property state). You may have bank accounts and such in the EIN number of the LLC that it may be easier to keep it operating as a partnership.

Do you plan on keeping the LLC once you buy him out or would you rather hold the property individually?

Regarding 1031 exchange: Is the property you're thinking about doing a 1031 exchange with held in your name individually? The buyer and the seller must be the same on the 1031 exchange so you could not sell a piece of property individually and then have your LLC be the buyer or something like that. Also, you can only buy real property - not an LLC interest - in a 1031 exchange. You have a lot of very detailed planning ahead of you here if you are thinking about doing a 1031.

As I said, definitely seek out counsel for this one.  There's a lot of planning required and the agreement between the two of you could be fairly involved.

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.