From: The Internet

Dear TaxMama,

My partner and I established an LLC to breed and race Thoroughbreds. All horses are owned 50/50.

My partner has decided he no longer wants to be involved with the breeding operation. We would like to do an exchange where he would trade his 50% of the mares for my 50% of some of the racehorses. We would transfer ownership from the LLC to our personal ownership. All horses are fully depreciated and expensed.

Can we do this? What else do we need to do?

Thanks,

Madeline

 

 

 

Dear Madeline,

You definitely need to get a competent tax professional involved, not a freebie columnist.

You have a lot of issues here.

1) Mares and racehorses are not treated the same way by the tax code. One is breeding stock, the other is racing stock - or inventory.

2) You have a potential dissolution here.

3) You won't be filing a partnership return any longer. You'll be filing a Schedule C.

4) Distribution of LLC or partnership assets, even with -0- basis isn't as straightforward as it looks.

5) Even though you have -0- basis, you will have to take fair market value of each animal into account. IRS has special rules about distributing assets to partners or members who contributed those assets to a partnership/LLC within 7 years before having the assets returned to them.

There will be a tax effect if either of you sell or dispose of those animals within a specified period of time after they've been distributed to you.

But yes, ALL of it is doable.

Please have someone do it right.

Best wishes,
Eva Rosenberg, MBA, EA