Distributions or Not from LLC and strategies??

[Matt N.]

I formed a partnership with an investor and we have $300k sitting in the operating account. Rather than paying a property manager a $1,000 fee to place our tenants in the property, I am doing that and partner told me I could take a distribution for that or write myself a check from the LLC. We have similar items that would allow me to take a fee.

I'm looking for guidance on how to strategically do this.

Since we have contributed $300k to the LLC, and it far in excess of what I am taking out, wouldn't the distributions only reduce our basis in the LLC and have no tax impact on me?

And is there anything that I need to be aware of as far as unequal basis to my partner going forward? I am struggling with wrapping my head around this idea and how that works. 

[Blake Meester]

@Matt N.

Your concerns about making an inequitable distribution may be warranted. You will need to look to your partnership agreement for guidance, and then make sure follow the very complex partnership distribution/allocation rules.

The distribution language I most often see is that distributions are made equitable to ownership as a return of capital or share of profits. Many times partners in a partnership with use a guaranteed payment to compensate a partner for services provided to the partnership. The guaranteed payment would be an expense to the partnership and income to the partner. The guaranteed payment route may accomplish your goal here but there are many ways to skin a cat… read your partnership agreement and talk with you tax professional.

I believe Jeffrey H. is speaking to the basis of the property held in the partnership while you are talking about the basis you have in the partnership interest. These are two different things. A distribution from the partnership would reduce your basis in your partnership interest (“Outside Basis”). Partnership taxation is often touted as the "most complex section of the IRC". Difficult stuff!