Tax Planning for sale of LLC

[equinecpa]

I have a client who has an LLC taxed as a partnership.
The major items on the balance sheet are as follows:

Fixed Assets
Cost 3M
Depn 2M
Net ACB 1M

Note Payable 1.5

Partner equity (.5M)

They have an offer to sell just the assets for 3.5M in an installment sale.

As a partnership they would incur tax on recapture of 2M-not a great scenario.

Is there a way to restructure this sale to avoid recapture? I was wondering if they elected S corp status prior to sale? They would have to pay taxes on the partner deficit, but would recapture be avoided? The offering party is a corporation if that makes any difference. In the offer on the table the debt is not being sold. Also wondering what holding period would apply if S corp status was elected-I'm thinking long term as they are selling the LLC which has been held for a long time.

[kathyc2]

Changing to a corporation would not have benefit.

Since the sale is more than the original purchase price, I'm assuming that a building is a large part of the asset values? Remember that the gain is calculated asset by asset.

[equinecpa]

But if they sold their interest in a corporation rather than assets wouldn't it be a sale of shares? I understand as an LLC electing partnership status, the sale would be allocated on an asset basis but I thought if they were an S corporation they could sell shares (or their interests) and then the normal stock sale rules would apply?

[Lion]

It sounds like the buyer offered to purchase the assets only. That's common so the buyer doesn't take on any hidden issues of the company, such as a lawsuit or unpaid debt.

Is that costly asset a building? You don't want to put that in a corporation. And, a buyer probably won't want to buy a corporation that owns real estate.