A common structure in the acquisition of the assets of a business is for the seller to receive equity from the acquirer in addition to cash. Receipt of a partnership or LLC interest in exchange for property is generally non-taxable. A seller can obtain substantial tax savings by deferring gain on the low-basis assets by specifying in the agreement that specific high-basis assets will be sold for cash and that certain low-basis assets will be exchanged for partnership interests. 

To take a very simple example, assume a seller has two pieces of real estate that it agreed to sell for $1 million each ($1 million cash and $1 million of LLC units), and the seller’s basis in one parcel is $800k and its basis in the other parcel is $400k. By selling the high-basis parcel for cash and exchanging the low-basis parcel, the seller’s taxable gain would be $200k. If the cash and units were allocated to the two properties equally, the total taxable gain would be $400k. For computing the gain, the basis of each property is allocated in proportion to the value of the property exchanged for cash and for equity. The gain on the high basis property would be $100k (i.e., $500k cash -$400k basis), and the gain on the low basis property would be $300k (i.e., $500k cash -$200k basis).  

However, the same may not be true for the acquisition of seller LLC units which is treated as an asset sale.  While no cases or rulings are on point, the IRS has indicated that associating certain considerations with certain assets may not be respected where a purchase of LLC interests is treated as a purchase of assets (e.g., Rev. Rul. 99–5).

Bottom Line:  By negotiating the identification of which assets are to be exchanged directly for equity and which for cash, sellers may be able to defer substantial tax liability.

“There are few things in life harder to find and more important to keep than love. Well, love and a birth certificate.” —Barack Obama