Advanced Tax Strategies for LLCs and Partnerships

Chapter 7Sale of an Interest in a Partnership or LLC

Learning objectives

• 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.
• Determine the consequences for the buyer associated with the sale of an interest in a partnership or LLC.

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 is long- or short-term is based on the partner’s holding period in the partnership interest, and not on the partnership or LLC’s holding period for its assets.

Example 7-1

J is a one-third partner in JDR Partners, a general partnership engaged in the real estate ...