Tax Consequences of Dissolving an Indiana LLC

[mahvha]

What is the name of your state (only U.S. law)? Indiana

Four siblings (and some of their children) created an LLC to manage a family farm they inherited from their parents. The LLC was established mainly to provide liability protection for the members and to provide a governance structure as there had been serious disagreements over the operation of the farm prior to the LLC formation. Governance has worked well, but as the members approach retirement age they find their goals diverging. Three of the siblings live outside of Indiana; the fourth lives in the area, leases the land as a farmer and would like the farm to never be sold. The farm is near a growing community and the other three siblings would like to sell their portions over the next 5-10 years. Although the three siblings could out-vote the farming sibling, they would like to avoid an all-out family fight.

One proposed solution is to dissolve the LLC and distribute the assets to the members based on their current ownership of the LLC, which is not evenly split among the members. The assets are almost entirely real estate (farmland, a few improvements, and three rental homes) and some cash. The current basis in the assets is based on the deaths of the parents (1987 and 2007), with it split approximately 50-50. By luck, the current ownership shares correspond to actual parcels of land with only a few minor adjustments of cash. This would allow the farming sibling to take ownership of the land with the improvements and continue to farm it while possibly renting the other parcels now owned by their siblings until that land is sold for development. Although it more complex (at least three entities instead of one) and expensive (multiple professionals involved), it is considered preferable to a big argument within the current LLC structure.

Will the dissolution of the LLC and distribution of the assets (a mix of real estate and cash) based on their percentage of LLC ownership trigger capital gains tax for the members? There would be no sale of LLC assets. Any sales of real estate would occur after the dissolution and any tax consequences would be the responsibility of individual members. I'm not looking for any advice on the determination of the cost basis of these inherited assets, just wondering if capital gains can be triggered when no sale has occurred. I also realize there may be other tax consequences for the individual members, but it is the capital gains question that is causing everyone to hit the "pause" button at this time.

 

[FlyingRon]

By and large there isn't a capital gain when distributing the real estate to the llc members (or partners in a partnership). However, you probably should have an accountant resolve all the distributions especially when you're trying to apportion a mixture of property and cash accounts. Partnership tax paperwork always makes my head swim. It's one of the reasons I dump all my K-1's on my accountant rather than trying to figure it out myself.

How did the property pass into the LLC, if the property went to the spouse as survivorship rights first, then the basis is got stepped at the surviving spouse's death. If part of it went to the kids, then yes, you do have to split the basis.

 

[mahvha]

LLC Dissolution

50% of the farm was acquired before the marriage of the parents and was held by the father; he never added the wife to the title. The remainder was acquired after the marriage and was jointly held. Upon his 1987 death his 50% of the farm went into a trust to provide income to the mother. When she died in 2007 the trust was dissolved and the siblings owned the father's land as joint tenants until an LLC was established. The mother's half of the farm went into a second LLC when she died because she had set up a trust with stipulations to ensure the land was farmed for a period of time. When those stipulations ended (two years ago) the two LLCs were merged into the one I'm discussing today. As you might guess, there is a huge difference in the cost basis of the two halves of the original farm because of the passage of 20 years and significant urbanization in the area (10:1 ratio). I guess a good secondary question is whether the cost basis got homogenized in the LLC and is the same per acre when dissolution occurs, or do the different parcels have very different basis for cost?

 

[LdiJ]

50% of the farm was acquired before the marriage of the parents and was held by the father; he never added the wife to the title. The remainder was acquired after the marriage and was jointly held. Upon his 1987 death his 50% of the farm went into a trust to provide income to the mother. When she died in 2007 the trust was dissolved and the siblings owned the father's land as joint tenants until an LLC was established. The mother's half of the farm went into a second LLC when she died because she had set up a trust with stipulations to ensure the land was farmed for a period of time. When those stipulations ended (two years ago) the two LLCs were merged into the one I'm discussing today. As you might guess, there is a huge difference in the cost basis of the two halves of the original farm because of the passage of 20 years and significant urbanization in the area (10:1 ratio). I guess a good secondary question is whether the cost basis got homogenized in the LLC and is the same per acre when dissolution occurs, or do the different parcels have very different basis for cost?

Each parcel would have its own cost basis based on what you are describing.