Taxes payable on LLC liquidation

[Jewelwing]

My husband and I owned an LLC that held rental properties. We dissolved the LLC this year after first having sold all the properties. Section 1231 gain on the sales is approx $600,000. Section 1250 gain is approx $160,000. I understand that the latter is taxed as income tax and that CGT applies to the remainder ($440,000).

As a final step in the winding-up process, we received approx $1,000,000 in cash. If I've calculated our basis in the LLC correctly, this amounts to approx $580,000. When I enter our K-1s into TT, will we pay CGT on both the $440,000 mentioned above, PLUS the $420,000 distribution ($1,000,000 distribution minus $580,000 basis)? This feels like double taxation, and I'm hoping this will not be the case!

Thank you.

[Mike9241]

The distribution is only taxable if it exceeds your basis before the distribution.  This is usually unlikely. 

for example, say your basis at the beginning of the year was $600K.  $400K the tax basis of the properties + $200K the tax basis you get from certain partnership liabilities.  in addition to the properties, the partnership has $200K in cash. (total assets $600K, total liabilities and partners capital $600K - they must equal). The properties are sold for a net of $1M. your gain is $600K. you pay off the $200K in liabilities. tax basis goes up by the $600K gain and down by the $200K  decrease in liabilities netting to a tax basis of $1M. Making the $1M cash distribution exactly equal to your tax basis before distribution.   

However, there could be situations where the distribution is more than tax basis. We have no way of knowing if you are calculating the tax basis correctly. 

[Jewelwing]

Hi Mike,

Thank you very much for your response and I apologise for taking a few days to reply.

If you wouldn't mind hand-holding me through this a bit more, I'd appreciate it! First, let me put some real (rounded) numbers on this process since it will make more sense (to me anyway). The properties have been held for 10+ years. At the beginning of 2024, their cost basis before depreciation was $450k, taking into account purchase costs, capital improvements, appliances, etc, over the years. Depreciation was $150k, and there were no liabilities (other than owner invested capital of $2,000, $1k per partner). Cash position was $200k. So, $450k + $200k - $150k = $500k total assets.

Once the properties were sold, their adjusted basis taking into account sale costs and depreciation was $360k. Total gross proceeds were $950k, leaving a gain of $590k. I have therefore entered $290k on line 10, Net Section 1231 Gain, of each partner's K-1. Each partner also has $75k of Unrecaptured Section 1250 Gain on line 9c.

When the LLC was liquidated, the distribution to each partner was $500k. I have been working on the assumption that each partner's basis in the LLC is calculated by adding up their cash and property contributions to the LLC, plus their income as reported on each year's K-1, minus distributions. For property contributions, I have used only the original value. My calculation for each partner's basis in the LLC comes to $280k. I'm not sure how to reconcile that with the $290k on line 10 since they seem to be two totally different calculations, even though the two numbers are very similar.

Does it mean that each partner pays capital gains on $215k ($290k Section 1231 minus $75k Section 1250 on which income tax is paid), AND capital gains on $220k ($500 distribution minus $280k basis in the LLC)?

Maybe I'm muddling these two things together, so would appreciate your continuing guidance. Thank you very much.