Capital Gains Tax Bomb When Selling Share of LLC

[zero_house]

My wife and I are selling our 50% share of an LLC we own with friends. We built a cabin together and rented it out on a nightly basis. Because we put a lot of sweat equity into it and home values have risen in the area, the value of our share has appreciated considerably, and I am calculating a capital gain of around $230k. Factoring in excise taxes we have to pay (on the full value of the house) to the state and county, plus capital gains taxes owed to the IRS and our new home state, my rough calculations are that we will owe about $50,000 in taxes.

15% capital gains tax - federal (incl. $40,000 capital loss carryover)   $28,887
Washington state REET   $8,783
Okanogan County Excise tax   $1,900
Wisconsin capital gains tax (incl. $40,000 capital loss carryover)   $10,649
total taxes   $50,219

This will also disqualify us from a healthcare.gov subsidy of about $1,000/month for next year.

Other than working out an installment plan with the buyer, which we would rather not do, am I missing any opportunities to reduce this tax liability? I am a freelancer, and our ordinary income usually works out to be about $90k.

Thanks for any advice!

[bacchi]

By freelancer, that means you're a 1099 or C2C employee? If so, can you max out a solo 401k and traditional IRAs in order to decrease your earned income?

Can you pull forward any charitable donations and create a DAF?

[reeshau]

What are you doing with the money?  If you might look at another place, could you do a 1031 exchange?

[zero_house]

It looks like the tax situation may be worse than I thought because I failed to account for depreciation recapture. I also didn't subtract the depreciation from the basis, so the capital gains taxes will also be higher than I thought :-(

I don't think I can do a 1031 exchange, since I am selling my share in an LLC, not the property itself. The LLC will continue to exist, only with a different member than me.

Thanks for the solo 401k suggestion. I was just looking into that, as it seems like it's the only thing I can do to at least minimize my ordinary income for the year.

Wondering if I should seek the advice of a CPA or financial planner. 

[morethanconquerors]

You are describing a multi-member LLC, which is taxed as a partnership by default. Have you been doing partnership returns and receiving K-1s in relation to this LLC?

If this entity is a partnership, your capital gains would be calculated by taking: cash and/or property received - your basis in your partnership interest. Depreciation recapture of the cabins would not apply since you are selling your partnership interest and not the asset itself.

Hopefully you have been doing partnership tax returns and your tax preparer has been keeping your basis schedule. In short, your basis would include money put into the business + profits - losses - money taken out. Debt taken on personally and/or by the partnership would also go into this calculation, but can be a little complicated.

[zero_house]

You are describing a multi-member LLC, which is taxed as a partnership by default. Have you been doing partnership returns and receiving K-1s in relation to this LLC?

Yes, we receive K-1s and have been doing partnership returns.

We no longer have any LLC debt, so thankfully that should be simple.

My understanding is that because we have a 50% share in this LLC, and the LLC owns real estate, that when we sell our share, it's considered a controlling interest, and the sale of the share is treated more or less like a sale of the real property itself, triggering local and state excise taxes and depreciation recapture. I don't know enough about it to be sure, though, and I hope you are right that the depreciation recapture wouldn't apply. I will have to research this further.