LLC Exit Strategy 2025

Executive Summary

Selling an LLC interest isn't just a simple capital gain transaction. Because an LLC is a "Pass-Through," the IRS looks through to the underlying assets. If you have "Hot Assets" (like receivables or depreciated equipment), a portion of your gain is reclassified as Ordinary Income (taxed up to 37%).

Furthermore, Installment Sales are dangerous. You must pay tax on all depreciation recapture in Year 1, even if you don't receive cash for years.

The Split

Gain Bifurcation: Your sale is treated as two transactions: Sale of Hot Assets (Ordinary) + Sale of Residual Interest (Capital).

Hot Assets

Section 751: Unrealized Receivables (Cash basis) and Inventory trigger ordinary tax rates, eroding your exit value.

The Trap

Installment Sale: Recapture tax (Sec 453(i)) is due immediately. You can be insolvent if the down payment is too low.

Sale of Interest (Section 741)

The General Rule

Generally, selling your LLC interest creates Capital Gain (Long Term if held > 1 year). The calculation is: (Cash + Debt Relief) - Outside Basis.

Phantom Cash (Debt Relief)

If the buyer assumes your share of the LLC's debt, that counts as Cash Received.

Example: You sell for $100k cash but are relieved of $900k debt. Your "Amount Realized" is $1 Million. You are taxed on $1M, not $100k.

The Hot Assets Trap (Section 751)

This is the exception that swallows the rule. You must "look through" to the assets.

Unrealized Receivables

For Cash-Basis LLCs (Doctors, Consultants), uncollected invoices are taxed as Ordinary Income upon sale.

Recapture: Depreciation on equipment (Sec 1245) is also treated as a "Receivable."

Inventory Items

Any asset that isn't capital (stock in trade).

Note: Even $1 of appreciation in inventory triggers ordinary tax.

The Installment Sale Liquidity Crisis

Selling on a note? Beware of Section 453(i).

Immediate Recapture Rule

All depreciation recapture (Ordinary Income) must be recognized in the Year of Sale, even if you receive $0 cash.

Nightmare Scenario

Sale Price: $2M ($100k down, $1.9M note)
Recapture: $1.5M (from old equipment)
Tax Due Year 1: ~$555k (37% of $1.5M)
Cash Received: $100k
Result: Insolvent by $455k

Partner Buyout (Redemption)

If the LLC buys you out (Section 736), the tax treatment is flexible.

Payment Type	Tax to Retiring Partner	Deduction for LLC?
736(b) Property	Capital Gain	No (Non-deductible)
736(a) Income	Ordinary Income	Yes (Deductible)

*Service partnerships can classify Goodwill as 736(a) payments to create a deduction for remaining partners.

Interactive: Exit Tax Simulator

Estimate your tax liability on sale. See the impact of "Hot Assets" and Debt Relief.

Sale Details

Cash Received ($)

Debt Relief (Phantom Cash) ($)

Outside Basis ($)

Hot Assets (Sec 751) ($)

Depreciation Recapture, Inventory, AR.

Tax Breakdown

Total Gain Realized

Amount Realized - Basis

$0

Ordinary Income

Taxed @ ~37%

$0

Capital Gain

Taxed @ ~20%

$0

Est. Tax Liability

Fed Tax Only (Est.)

$0