Help! Partnership Distribution of Assets

[winnie]

I need help. Big time.

I have an LLC treated as a partnership. They own 2 condos that they bought at separate times. There are two partners (Partner 1 and Partner 2). Partner 2 wants out of one of the condos. So, they will transfer the ownership of that condo to a newly created single member LLC owned Partner 1. Partner 1 will pay Partner 2 for his half of the equity.

When they bought this condo in 2006, they paid cash, with Partner 1 paying $140,000 and Partner 2 paying $20,000. The deal they have worked out takes into consideration the use of Partner 1's money, so his payment to Partner 2 will be less in consideration for his payment of most of the condo.

Question: Is this a property distribution to Partner 1? Is that done at book value? And then, my software doesn't like to do a distribution unless it is a sale. If I distribute this to Partner 1, and we have rental real estate losses from last year, I need to treat it as a sale?... Now I am back to chasing my tail! This is my biggest issue here -- how to get the condo out of the partnership and account for that properly on the partnership return and be sure I have the accurate starting point for my client (Partner 1) on his new LLC with the basis of the condo.

Should the payments be made personally to Partner 2, or paid to the partnership, then distributed to Partner 2?

I would really appreciate your thoughts. This is too hard to do in the summer!

[dsi]

Winnie, let's disect this little by little. You say your client is an LLC P/S. Furthermore, they (?) own 2 condos. Who are THEY? That is, are the titles to the condos in the name of the LLC? OR the members names?

[winnie]

Thanks for your reply.

Condo was originally titled to LLC (taxed as partnership). My client is the LLC plus one of the members (partner 1), the one who will end up with the condo.

If I understand correctly, the plan is to quit claim deed the property to Partner 1's new LLC where Partner 1 is the only member.

[Bees Knees]

You have to split the Condo into two assets because you have two separate rules going on here.

1. You have a distribution to Partner 1 for his/her half of the Condo.

2. You have a sale of Partner 2's half to Partner 1.

A distribution from a partnership to a partner of partnership property is non-taxable. The partner simply picks up the partnership's basis in the property distributed. A sale of a partner's interest in the partnership to another partner is a taxable gain. The purchasing partner's basis in the property acquired is the purchase price that is paid.

I would do these calculations outside of your software, as it propably won't allow you to split the asset into two after the fact.

[winnie]

Still hangin' in on this one

Splitting the asset makes sense. That way I can have a disposition, plus the distribution.

So, Partner 2 can have a complete disposition of his half and take care of suspended losses, etc.

Will Partner 1 transfer his suspended losses, just like he will keep his basis? (This is subject to the real estate rules and his income is too high to take a loss).

Partner 1 paid a lot more initially for this condo than Partner 2 did. Does that matter?

And, finally, does it matter if Partner 1 pays the partnership or Partner 2?

Thanks for your help.