LLC Cash Out Refi Tax Question

[Richard Andrade]

Hello! I have a scenario, I wonder if someone with tax skills can help me figure out. Here's the hypothetical:

An LLC with 2 members owns $2 million in fully-paid residential real estate assets. No mortgages. The LLC wants to do a full cash-out refinance on the properties, to pull $1.6 million out (80% of value) .

Two questions:

1) Since these are loan proceeds, not revenue or income, I imagine the LLC would not get taxed on these proceeds.

2) If the LLC turns around and distributes those loan proceeds out evenly to the 2 LLC members, how are those proceeds treated for tax purposes? Specifically, are they taxed to the members as regular distributions even if they are loan proceeds and don't represent revenue/income of the LLC?

Thanks in advance!

Richard

[Steven Hamilton II]

That would depend upon the basis of the partners. You could end up with a distribution in excess of basis; however, there is not enough information here to determine that. There are also implications of using loan proceeds to pay out distributions. Here is an article on the topic for you.

https://www.wgcpas.com/396-tax-matters-tax-implications-of-debt-financed-distributions/