Dissolving Membership Interest in LLC with Mortgage Liability

[Jerome Nunez]

BP, 

I own a 33.33% membership interest in an LLC that holds a two-family property, alongside two partners with equal stakes. Due to strategic differences, I plan to dissolve my interest within the next 3-6 months. However, my name is on the mortgage.

Are there ways to dissolve my interest and remove my name from the mortgage without selling the property? I’m considering taking owner’s draws to recoup my initial equity in the short term but am unsure about the tax implications. I’ll be consulting a CPA, but would appreciate any insights from the BP community!  

[Ashish Acharya]

@Jerome Nunez Dissolving your LLC membership and removing your name from the mortgage can be complex, especially if you're aiming to avoid selling the property. Here's a breakdown of your options and considerations:

1. Transfer of Membership Interest: You can dissolve your membership by selling or transferring your 33.33% stake to the remaining partners or a new member. This would involve an agreement with your partners and a formal transfer of ownership, typically through an updated operating agreement.

2. Mortgage Liability: Since your name is on the mortgage, removing yourself from liability usually requires the lender’s approval. One way to do this is for your partners to refinance the loan in their names, releasing you from the mortgage. Lenders might consider this if the other members have sufficient credit and income, but this is up to the lender’s discretion.

3. Owner’s Draws and Tax Implications: Taking owner's draws to recover your initial equity is possible, but this can have tax consequences. Owner's draws aren't typically taxed directly, but any gain or capital distribution may have tax implications, especially if the amount withdrawn exceeds your basis in the LLC.

4. Alternative Solutions: If refinancing isn’t possible and a buyout is needed, consider a structured buyout agreement where the remaining partners gradually purchase your share, allowing you to exit while they assume full ownership.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.