Blanket Loan Property Sale Capital Gain

[Grady Collins]

Hi, I've never posted on BP before, but have been an avid reader and know there are a lot of smart people on the site who may be able to help me with a tax question.  I was unable to find this scenario, but if someone is aware of an existing post or can help, I would be very appreciative.

Background:

-Established an LLC with a partner and bought a single tax parcel of land with 2 existing buildings on the property (1 multifamily building in good shape and fully rented - Building A; 1 in substantial disrepair - Building B)

-Financed the entire purchase (both buildings) under a single blanket mortgage secured by all of the assets of the LLC

-Worked with an attorney and the city and had the buildings legally separated; No loan modifications were made (or required)

-Did a full rehab of Building B and turned it into a multifamily

Numbers for Discussion Purposes: 

-Building A market value $225K; Tax basis $115K

-Building B market value $450K; Tax basis $225K

-Blank Loan outstanding $325K

Question:

I now have the opportunity to sell Building B for the assumed market value above.  I would like to sell the building and extinguish the entire loan.  Do I need to recognize a capital gain on the sale of a) $225K ($450K minus basis of $225K), b) $125K ($450K minus loan of $325K), or c) something in-between (i.e., am I required to apportion the loan between the buildings in some manner)?