Tax Implications for LLC Sale - Owner Financed

[Nik Divakaruni]

I've got a doozy here.  If anyone has a good solution for this, I will be hugely grateful.

My wife and I are currently the owner of an LLC with 30 doors across 6 properties. We've been approached by a buyer to purchase the LLC from us (and subsequently all the assets) for a price, but he wants us, as sellers, to carry a loan. He's agreed to take over all costs, and will be entitled to all income from the properties during the time he's paying off the loan.

If we move forward with this, I assume we would have to now file a K-1 as the LLC is no longer a pass-thru entity for my wife and me. The buyer will have the full P&L on his K-1.

We still carry a note for the properties (one note, thankfully).  The buyer would, I assume, take out a loan to buy our business.  That loan will be between me and him.  

Here's my question: Since the LLC has the existing note for the properties, and the interest the buyer would pay me would be personal, I would owe tax on the entire interest income from his loan, and since the interest expense on the existing note is through the LLC, I wouldn't be able to offset the two, right?

Further, since the buyer would take over all costs and income, he would be able to write off the interest from his personal loan to me against the business (since it's being used for business purposes) AND would be able to write off the mortgage interest from the bank note (since it's in the LLC).

Is there a solution here, where I can deduct the interest on the note through the LLC, from the interest income I'm making off his personal loan? Also - does someone potentially have a better way to structure this deal so I'm not getting hosed on the tax consequences of the interest income?

Any advice would be greatly appreciated.  Thanks!

[Eamonn McElroy]

@Nik Divakaruni

If you're treating the LLC owned by you and your wife as a disregarded entity, selling it to someone would generally be considered an asset sale.

Like @Basit Siddiqi mentioned, there's no reason for you to get a K-1 (i.e. remain an equity investor) going forward as you have sold.  The buyer steps into you and your wife's shoes and you get cash and/or a note in return.

I encourage you to work with your attorney and CPA to ensure that you're both protected during the process and the sale is structured efficiently from a tax perspective.