I am the sole owner of a pass-through LLC. My LLC owned membership interest in another LLC that was liquidated at a loss. How do I report the loss?

[Rick19744 · Accepted solution]

Your LLC, as a single member LLC, is a disregarded entity for federal income tax purposes.  As such, it is as if you owned the interest in the "other" LLC directly.

As a member of a multi-member LLC, you should be tracking your basis in your LLC investment.  This begins with your initial capital contribution and is adjusted annually for the applicable lines on the K-1 you receive.

Once you determine your basis, you can then determine your gain or loss.  This is determined by subtracting your liquidating distribution from your basis.  If you have basis remaining, then you have a capital loss.  If your basis goes negative, then you have a capital gain to the extent of the negative amount.  Either of these amounts are reported on Schedule D and the applicable form 8949.

When you liquidate your interest there is a possibility that you have what is known as Section 751 gain.  This gain is ordinary income; a result of your portion of what is called "hot assets" - generally depreciation recapture and unrealized receivables (if the LLC was on the cash method of accounting).  The preparer of the LLC return should provide this information on your K-1.  

[afvittoria]

Thanks, Rick19744.  Very helpful.  Here's a follow-up:  The multi-member LLC was created in 2015 and folded/dissolved in 2016.  So, while there was a distribution, it was far less than my basis.  That would mean a capital loss, correct?  Am I limited in the amount of this type of loss I can take each year?  Thanks!

[Rick19744]

In general, based on what you provide, you would have a capital loss.  This is premised on the fact that you don't have any Section 751 property.  If you do, then the result would be different.

Let's have a hypothetical example here to explain this concept: If your overall loss is $10,000 but you have $2,500 of Section 751 gain, then you would have $2,500 of ordinary income (reported on form 4797) and then a capital loss of $12,500 (reported as noted previously) which nets to the same $10,000.

For your last question, capital losses are limited to the extent you have capital gain plus $3,000.  So using the above example, if you had no other capital gains you would be limited to $3,000 per year.  Capital losses carry over indefinitely.