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integrity11
Level 1

Distribution of capital gain income to equity partners after real estate sale

I have a single purpose LLC with multiple equity partners.  The sole purpose of the LLC is to own real estate.  There are three possible situations that I would like help addressing.  This is a simple example.

 

Initial Transactions

Partner 1:  wires $50k to LLC

  • Debit:  $50k to Checking Account
  • Credit:  $50k to Equity Account for Partner 1

Partner 2:  wires $50k to LLC

  • Debit:  $50k to Checking Account
  • Credit:  $50k to Equity Account for Partner 2

 

Property PurchaseLLC wires $75k to buy property

  • Debit:  $75k to Fixed Asset Account
  • Credit:  $75k to Checking Account

 

To avoid drawing this out more, after purchase of the property, the LLC spent an additional $25k on expenses resulting in a $0 Checking Account balance.

 

Property SaleProperty sells for $150k

  • Debit:  $150k to Checking Account  
  • Credit:  $75k to Fixed Asset Account (zeroing out this account)
  • Credit:  $75k to Capital Gain Income

 

This is where there are three possible situations come up.

 

OPTION 1

Wind Up and Close LLCdisperse all bank proceeds to 50/50 equity partners

Write $75k check to Partner 1 & Partner 2

When you Write Check in Quickbooks, the Pay to the Order Of must be a Vendor so I have an equity account for each partner AND a vendor account for each partner.

  • Pay to the order of Partner 1 (Vendor)
  • Account:  Partner 1 (Equity)

The above structure results in a -$25k balance in the equity account.  The P&L will show $75k in Gross Capital Gain Income, $25k in Expenses, and $50k in Net Capital Gain Income.  Is this correct or am I supposed to allocate the income somehow to $0 out the Equity Account?  If so, how exactly am I supposed to do this?

 

OPTION 2

Wind Up and Close LLCdisperse all bank proceeds to 50/50 equity partners

Partner 1 is the Manager and gets a bonus manager split.

Write $85k check to Partner 1 & $65k check to Partner 2

Everything here is the same as OPTION 1 except the end result would show Partner 1 with a -$35k Equity Account and Partner with a -$15k Equity Account.  The P&L would be identical.  Is this correct or am I supposed to allocate the income somehow to $0 out the Equity Account?  If so, how exactly am I supposed to do this?  How would the extra manager split affect this structure?

 

OPTION 3

Keep LLC as an ongoing entity for future investments with partner changes

There are many situations that could happen here, but I care more about the structure of this.  Possible situations could be:

  • One partner leaves and a new partner comes in
  • A new partner/partners is added 

If one partner leaves and a new partner is added, we would be forced to $0 out the departing partners equity account.  That seems like it would be required.  The departing partner would take his profit and leave.  If a new partner is added, it would also change the percentages and would also require us to $0 out the equity.  It seems like zeroing out the equity account is going to be required in all situations, so what would I do differently here than what I would be doing in Option 1 or Option 2?

 

Thanks in advance for your help.

2 Comments 2
Rustler
Level 15

Distribution of capital gain income to equity partners after real estate sale

LLC is not a business type, it is alegal dodge that protects your personal assets in the event a law suit against the company goes against you. From what you say you are a sole proprietor for taxes and that is what counts.

 

A sole proprietor can NOT have additional equity partners/investors. So the basis for your question is illogical.https://yourbusiness.azcentral.com/sole-proprietorships-stockholders-13349.html

 

Your equity partners need to be changed to liability accounts, but doing that means you owe them the money. And the IRS says you must pay interest on the loan, Applicable Federal Rate is what it is  called, google it.

 

integrity11
Level 1

Distribution of capital gain income to equity partners after real estate sale

Knowing that there is more than one partner should have clearly shown that this is not a sole proprietor thus the basis for my question is very logical.  It is taxed as a partnership, but even if the LLC was taxed as an S-Corp, the question would be the same.  The income passes through via K1 to the partners.  It is not a single member, disregarded entity that is taxed as a sole proprietorship.  Thanks for your quick response.

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