Advanced Tax Strategies for LLCs and Partnerships

Chapter 7SALE OF AN INTEREST IN A PARTNERSHIP OR LLC

LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

•     Determine the tax consequences associated with the sale of a partner's or member's interest in a partnership or LLC.

•     Determine the amount of a partner's gain from sale of a partnership interest which must be recharacterized as ordinary income under Section 751(a).

•     Recognize how using the installment method to account for the sale of a partnership interest will affect how the partner will report his or her gain on the sale.

•     Recognize when the sale of an interest in a partnership will trigger a technical termination of the partnership.

•     Determine the tax basis and holding period of assets owned by the partnership following a technical termination.

•     Determine the tax consequences associated with subsequent dispositions of built-in gain or loss assets following a technical termination.

General Tax Consequences Associated With Sale

The general tax consequences of the sale of an interest in a partnership or an LLC are relatively straightforward. The general rule under Section 741 holds that the interest itself is a capital asset, much like stock in a corporation. Accordingly, under the general rule, the partner or LLC member will recognize a capital gain or loss in an amount equal to the difference between the amount realized on the sale and the basis in the interest. Determination of whether this gain ...