Purchase 3-unit from Business Partner (Buyout and Capital Gains Tax Liability)

[Quincy Mingo]

I own a 3-unit multi-family with a business partner. The mortgage is in the name of my business partner. The interest rate is 4.5. We put 5% down when we first purchased it in 2019. The loan is not assumable. I want to get the mortgage in my name and buy out my business partner. The current owed amount on the property is $407,000. The current market value is roughly $600,000. We have an Operating Agreement, that states I can buy him out.

Reasons for the buyout

• Business partner wants out of real estate
• To put the mortgage in my name and renovate to have as a primary residence
• Low Cost purchase of the multi-family over buying anything on the current market.

Possible Solutions I See

• Purchase the property from my partner with a new mortgage:
  • My interest rate would be market, anywhere from 6.5 – 7.5% rate for primary residence either using FHA, Conventional, 203K. Purchase price would be the current owed amount on the property. If possible, not use an agent, to lower commission owed expense (not sure if this is possible in Chicago, IL). From a purchase and tax standpoint, I would operate the business expenses as usual in the name of the LLC as previously done. Buyout my business partner with an agreed upon amount soon after the closing and change LLC to single member. Next year file taxes for the LLC with it now being a single member LLC. This is so neither of us would have to pay capital gains on the sale since it actually stayed as a property for the LLC, my business partner was just bought out. I would dissolve the LLC the year after the property purchase is seen on the return.

Please share thoughts about my idea and if there are better alternatives or details I am missing. I am working with my accountant and CPA to ensure this works and the have suggested this path forward.