Long or short term capital gain?

Question

I purchased a building October 17, 2017 via LLC, me 50% and one partner 50%. My contribution was 150k.

June of 2019, I sold my 50% share of the LLC to my partner for $250k (building was not sold). I received my principal back in June, and held $100k note in the property which was paid back to me on October 19, 2018 (a year and two days after purchase).

I thought I was being smart by making my gain long term, but now I've been told I'm wrong and it's all short term because I technically "sold" it in June. I'm failing to see how this would be any different than a seller financed sale that spreads cap gains over many years.

Would anyone who's confident of the answer please share? Much appreciated!

Ashish Acharya · Answer

Sold  on June 2018 right ?

Your gain will be short term.

Also this is not an installment sale because you received the entire payment in the same year. If you had received payment after a close of the tax year, this would be installment sale.

Based on your note, you might also have an interest component.

The date of the sale is June 2018.  And you would report entire this year that is subject to short term capital gain rate.

Wayne Brooks · Answer

@Jason Powell Nothing wrong with making 66% in less than a year though!

Michael Plaks · Answer

@Jason Powell

To add to an excellent answer by @Ashish Acharya, in addition to the $100k short-term gain, you will have a small amount of depreciation recapture tax.

Even if the second payment was received in Jan 2019, you would not have achieved the long-term treatment. You'd only spread the tax over 2 years, following the calculation described by @Wayne Brooks. But you would still end up paying the full short-term tax rate.

In order to achieve long-term treatment, you'd have to wait on signing the agreement to sell out your share until 1 year anniversary.

Marina Draper · Answer

Just read this thread and felt so bad for you Jason! Mistakes are an unavoidable part of doing business and becoming successful. But it is great that you posted it here! I hope other investors will read it and will learn how one call to a knowledgeable accountant can save them 30-50k in taxes. Thank you for sharing!

Jason Powell · Answer

Thanks Ashish!

Jason Powell · Answer

Thanks Wayne. I was hoping for a different answer :) Oh well, I'll count my blessings. Next time I will not assume.

Wayne Brooks · Answer

Nope, the sale occurred in June....that is what sets the date, and the amount and type of gain.

It’s different than the sale of property though owner financing because the seller met the requirements for long term cap gains At The Time Of The Sale.  He just pays the actual tax on that gain as he receives the payments....same as you, only yours is short term.

As far as I know, the $250k sale contains 40% profit ($100k), and $150k return of investment (60%) so my understanding is......for that $150k rec’d, 60% would return of investment (no tax) and 40%, or $40k would be taxable....same treatment on the $100k rec’d later, excluding any interest rec’d......same as when selling a property.

Long or short term capital gain?

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