In general, distributions of property other than cash from an LLC taxed as a partnership are tax-free to the members. This feature of an LLC is one reason why a business operating as an LLC may choose to be taxed as a partnership rather than a corporation.
There are five circumstances in which a distribution of property other than cash to an LLC member can trigger gain recognition for the LLC or an LLC member. A distribution of property to an LLC member that results in such member’s share of the profits or losses of the LLC to be reduced can result in one of the five circumstances where a member or LLC must recognize gain on a distribution of assets to a member.
I.R.C. Section 752 generally requires an LLC taxed as a partnership to determine the amount of liabilities that can be allocated to an LLC member for income tax purposes by reference to such member’s share of LLC profits or losses. Any reduction in an LLC member’s share of liabilities of the LLC is treated as a distribution of money, i.e. a “deemed distribution”, to such LLC member.
If the amount of the deemed distribution exceeds the LLC member’s tax basis in the member’s LLC membership interest, such member will recognize gain equal to the amount the deemed distribution of cash exceeds the member’s LLC membership interest tax basis.