SOLD my Shares in a Family LLC that was received as part of a Will

[bradpjax]

Hey there,, i had a question regarding to selling my Share in a Family Owned and Operated LLC that had all Farmland in the LLC, I was given this share when my Parents Passed Away, I recently Sold that Share of my LLC to another family member. My Question is this treated in the same Step up Basis as normal property or is this handled and recorded Differently. I sold this Share at the same price that someone else in the family did years ago, as this was the set price the family had on those shares. The Current Value of that Share of Property is greater than what it was sold for... So would i way say that this was either a Neutral Sale or a Loss because of the current value... 

Im really lost on this one and not sure how to file and certainly dont want to get hit with massive Capital Gains if at all possible... Any Help would be appreciated. 

[Anonymous_]

I am going to page @Rick19744 for good reason.

Partnerships have two bases: an inside basis and an outside basis. 

There is no doubt whatsoever that your outside basis is stepped up to its fair market value on the date of death. 

However, there may be a disparity between the inside and outside basis after the step-up and that can only be cured by the partnership - I think (a section of the Code allows for this (I believe it's 743) but the election has to be made by the partnership under Section 754 - @Rick19744 can confirm or deny this).

[Rick19744]

While we can most likely handle most questions on a forum such as this, sometimes the issue requires more information / details and is more conducive with a one-on-one meeting with a tax professional; which based on your limited facts does warrant that discussion.

I will provide a few high level comments to keep in mind when you have that meeting:

• As was mentioned, when your parents passed away and you received your interest in the LLC (which I am assuming is treated as a partnership), your beginning basis in your investment was the FMV at the date of death.
  • This is the beginning point for your initial tax basis (outside basis).
  • You have the burden of proof as to what that FMV was at that time; ie: possibly the filing of an estate tax return, etc.
• Once you became a member of the LLC, you received a K-1 every year of which was used to prepare your individual tax return.
• This annual K-1 should also be used to adjust your tax basis each year based on the applicable lines on the K-1.  Hopefully this has been handled and is up-to-date.  If not, that could be a significant project; but maybe not....see related party comment.
• Now you are to the point that you sold your interest in the LLC.
  • In a normal sale, you would have a selling price and then a cost basis; the cost basis being your tax basis in the LLC.  This then determines your gain or loss on the sale of your interest.
  • Since a sale of a partnership interest is a "look-through" sale, some of the gain could be ordinary gain instead of capital gain depending on the partnership property; inventory, depreciation recapture, etc. (hot assets).
  • While you may not have this issue, based on the limited facts, you do have an issue of selling to a related party AND the sale was not an arms-length transaction.
  • As a result of that, there could be some gifting issues involved, and could preclude the ability to take any loss; the facts don't indicate the family relationship and there are a couple of code sections that deal with related parties.

The partnership world is complex regardless of the size of the business.

As noted above, I suggest you meet with a tax professional to help you determine the correct tax implication to both you and the buyer.