Installment Sale of Membership Interest in an LLC with a Negative Capital Basis

I sold an Membership interest in an LLC in 2019. I will receive payments for the interest in 2020 and beyond. I had a negative basis in my Capital account at the time of sale. I am trying to record this sale on my 1040 as an Installment Sale but Turbo Tax will not let me file my return with a negative number on Line 8, Part 1 of Form 6252 - Cost or other basis of property sold. I am trying to recognize the recapture of my negative basis as a gain in 2019 and report the gains from payments received in future years. How can I report this sale on my return correctly if Turbo Tax will not let me use Form 6252 to do so?

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1 Best answer

Level 13

Sep 23, 2020 4:58:16 PM

There are a number of issues here:

First, your capital account has nothing to do with what your gain or loss is at the personal level. You need to know your outside tax basis. You should have been tracking this from the inception of your ownership of the LLC interest.
Your outside tax basis cannot go below zero (or negative as you indicate).
If your tax basis is negative, that means technically you have filed a previous tax return incorrectly. This also means that one or more prior returns may need to be amended.
Depending on what type of assets were held by the LLC, you may have what is known as "hot assets" (Section 751 property) which requires you to recognize ordinary income. You don't recognize any additional gain or loss, it is a reclassification issue.
Even when the LLC interest is sold on an installment sale basis, all Section 751 income (hot assets) must be recognized in the year of sale. This income will be reported on form 4797 and then carry to the form 6252 on line 12.
The sale of an LLC interest, regardless of the $$ involved, is a complicated matter. I highly recommend you consult with a tax professional so you can complete and file an accurate tax return.
The information for item 4 above, will need to be provided by the LLC.

Level 4

Sep 23, 2020 4:38:48 PM

Don't think you can have a negative basis on line 8 no matter what so maybe add the negative amount to the selling price and use a 0 basis.

Level 13

Sep 23, 2020 4:58:16 PM

There are a number of issues here:

First, your capital account has nothing to do with what your gain or loss is at the personal level. You need to know your outside tax basis. You should have been tracking this from the inception of your ownership of the LLC interest.
Your outside tax basis cannot go below zero (or negative as you indicate).
If your tax basis is negative, that means technically you have filed a previous tax return incorrectly. This also means that one or more prior returns may need to be amended.
Depending on what type of assets were held by the LLC, you may have what is known as "hot assets" (Section 751 property) which requires you to recognize ordinary income. You don't recognize any additional gain or loss, it is a reclassification issue.
Even when the LLC interest is sold on an installment sale basis, all Section 751 income (hot assets) must be recognized in the year of sale. This income will be reported on form 4797 and then carry to the form 6252 on line 12.
The sale of an LLC interest, regardless of the $$ involved, is a complicated matter. I highly recommend you consult with a tax professional so you can complete and file an accurate tax return.
The information for item 4 above, will need to be provided by the LLC.

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Installment Sale of Membership Interest in an LLC with a Negative Capital Basis