Me and two other investors are combining forces. Part of what we are trying to do is add myself and another guy to the third partner’s established LLC. The third partner’s LLC has him as a sole member right now. We contacted the attorney and they said that if we add two other members to his LLC and transfer over 50% ownership we will be subjec to real estate tax. The LLC has around $3.5 mil in assets under it so that would be a huge bill.
Does anyone know how we can get around this? We all want to be equal partners on this LLC but do not want to get hit with this tax.
You’re not transferring real estate to a new owner. this is the equivalent of a corporation issuing more stock. title is not changing hands, which is what usually triggers a transfer tax.
I assume that you are contributing capital worth approx 1/3 of the LLC’s value. otherwise you may have gift tax issues, but I don’t see anything that would trigger the ambigious “real estate tax.”
you are correct, title is not being transferred, only ownership of the LLC. I am not bringing any immediate capital to the table so what kind of gift tax issues will arise?
This happens all the time here in Vegas. When you buy into an established LLC with real assets, a sale is occuring (whether or not any actual money changes hands.) Each third of the ownership has a “value” based on the underlying assets.
The LLC has to book the sale on its balance sheet and report it on taxes. The LLC is the one that will incur the tax liability, not the new partners. The LLC will incur tax liability only if it makes a gain or profit. You could have the assets appraised and determine how much over basis the FMV is currently. If it is par or below FMV, there will be little or no tax liability for the LLC when it sells shares to the new members.
Now, depending on how the LLC itself reports its taxes (flow thru or like a c-corp) it can defer tax liabilities or offset gains with expenses/loss, etc. You need to get with a CPA and run through different scenarios to see which will have the least tax impact. Atrny and CPA sometimes have “clashing” ideas. It’s up to you to pick their brains and find an equitable solution.