Selling the membership interests in an LLC taxed as a partnership is not one clean capital gain event. Section 741 treats your interest as a capital asset. Section 751(a) then carves out the price tied to unrealized receivables and inventory and taxes that slice as ordinary income. Stated as of July 2026.
What happens for tax purposes when one buyer purchases all of the membership interests in my LLC?
When one buyer acquires all membership interests in a multi-member LLC taxed as a partnership, Revenue Ruling 99-6 treats the LLC as liquidating and distributing its assets to the members, and treats the buyer as buying those assets. The buyer takes cost basis. You report a partnership interest sale under Section 741.
That is a two-character transaction. On the buyer’s side it is an asset purchase, with basis set by the price paid and allocated under the residual method, and depreciation and amortization measured from that basis. On your side it is the sale of an interest under Section 741, even though the LLC terminates as a partnership when the last other member leaves.
The regulation says so directly. Section 741 applies to all the members when they sell their interests to persons outside the partnership, and it applies even though the sale terminates the partnership.
Law: Rev. Rul. 99-6, 1999-1 C.B. 432; 26 U.S.C. 741; 26 U.S.C. 1012; 26 U.S.C. 1060; 26 C.F.R. 1.741-1(b).
Why is the sale of my LLC interest not all capital gain?
Section 741 carries an exception. Gain on the sale of a partnership interest is capital gain except as otherwise provided in Section 751, which covers unrealized receivables and inventory items. Section 751(a) treats the amount you receive attributable to those assets as realized from the sale of property other than a capital asset.
Property other than a capital asset means ordinary income at your ordinary rates. The rule does not depend on what the agreement calls the transaction, or on whether anyone mentions Section 751 at closing. It runs off what the LLC actually owns on the closing date.
Two qualifications matter. Inventory items fall under Section 751(a) whether or not substantially appreciated; the statute dropped that requirement for sales in 1997, and the language still in the regulation text survives only for Section 751(b) distributions. The ordinary income figure is computed separately, so modest overall gain can still produce Section 751 ordinary income alongside a capital loss on the interest.
So the question is never whether this is an equity sale or an asset sale. It is what percentage of your price sits on hot assets.
Equity does not mean capital gain. It means capital gain minus whatever Section 751 takes out first.
Law: 26 U.S.C. 741; 26 U.S.C. 751(a), (d); 26 C.F.R. 1.751-1(a)(2), (e).
What counts as a hot asset in my company?
Hot assets means LLC property that would produce ordinary income if the LLC sold it rather than capital gain. Section 751 reaches unrealized receivables and inventory items. Unrealized receivables covers amounts not yet taken into income for goods delivered or to be delivered and services rendered or to be rendered, and it sweeps in depreciation recapture.
Two fact patterns produce most of the damage.
- The cash-basis service business. A company on the cash method has not reported its billed work. Those receivables, and unbilled work in progress, are unrealized receivables. The receivable that would have been ordinary income next month is ordinary income at closing instead.
- The heavily depreciated equipment base. The flush language of Section 751(c) treats Section 1245 property as an unrealized receivable to the extent of the gain that would be recapture on a sale at fair market value. Every dollar of accelerated depreciation and expensing you took drove adjusted basis toward zero, building a block of ordinary income into the balance sheet.
Rule, then application, then consequence. A trucking, machining or contracting company with a fully expensed fleet and a large aging report carries an ordinary slice however the deal is papered.
| What the LLC owns | How Section 751 sees it | Character to you |
|---|---|---|
| Cash and deposit accounts | Not Section 751 property | No ordinary character |
| Cash-basis accounts receivable | Unrealized receivable | Ordinary income |
| Unbilled work in progress | Services rendered or to be rendered | Ordinary income |
| Inventory items | Inventory under Section 751, appreciated or not | Ordinary income |
| Depreciated equipment and vehicles | Section 1245 potential recapture, treated as an unrealized receivable | Ordinary income up to the recapture amount |
| Owned building held in the LLC | Look-through for unrecaptured Section 1250 gain; actual Section 1250 recapture is Section 751 property | Capital gain, unrecaptured portion capped at 25 percent as of July 2026 |
| Goodwill and going concern value | Not Section 751 property | Capital gain under Section 741 |
Law: 26 U.S.C. 751(a), (c), (d); 26 C.F.R. 1.751-1(a), (c)(4)(iii); 26 C.F.R. 1.1(h)-1.
How is selling a single-member LLC different?
A single-member LLC with no entity election is disregarded as an entity separate from its owner for federal income tax purposes. There is no partnership interest to sell and nothing for Section 751 to recharacterize. Selling one hundred percent of the membership interests is a sale of the underlying assets, reported asset by asset.
That is the mirror image of Revenue Ruling 99-6. Revenue Ruling 99-5 runs the other direction: a buyer taking part of a single-member LLC is treated as purchasing an undivided interest in each of the LLC’s assets, with a partnership forming afterward.
Practical consequence for a one-owner LLC. There is no Section 741 capital gain wrapper. Every asset is characterized on its own facts: recapture on the equipment is ordinary income up to the depreciation taken, gain above that on equipment held more than a year is Section 1231 gain, receivables are ordinary income, and goodwill produces capital gain. The planning work is the same. The label is different.
Disregarded status is a federal income tax rule and nothing more. The LLC still exists under state law, and transfer taxes, sales tax, titles and licenses follow their own rules.
Law: 26 C.F.R. 301.7701-2(c)(2)(i); 26 C.F.R. 301.7701-3(b)(1)(ii); Rev. Rul. 99-5, 1999-1 C.B. 434; 26 U.S.C. 1231; 26 U.S.C. 1245.
Who decides how the purchase price is allocated across the assets?
Allocation of the purchase price across the LLC’s assets is a negotiated term of the purchase agreement, not a post-closing accounting chore. Section 1060 requires the residual method for an applicable asset acquisition, the values must reflect fair market value, and the values a buyer prefers are frequently the ones that enlarge your ordinary income.
The buyer’s incentive is straightforward. Dollars parked on equipment, receivables and inventory come back as fast deductions; dollars parked on goodwill recover slowly. Your incentive runs the other way, because goodwill is capital gain to you and the equipment line is where recapture lives.
I ask for the depreciation schedule and the accounts receivable aging before I read a draft allocation schedule, because the allocation is only arguable within the range the books support.
Three things follow from that.
- Silence is not protection. Section 751 applies whether or not the agreement addresses it, and an agreed allocation does not override the statute. Leaving the allocation blank does not move ordinary income into capital gain. It means you learn the number after losing the leverage to price it.
- The reporting is not symmetrical. In a Revenue Ruling 99-6 purchase, the Form 8594 instructions put that filing on the buyer, who is treated as acquiring assets; your side reports a Section 751(a) exchange instead. Where the deal is an asset sale in form, including a disregarded single-member LLC, both sides file Form 8594, and contradictory numbers invite examination.
- Side payments are their own line. A covenant not to compete goes in the Form 8594 class for Section 197 intangibles other than goodwill; the payment is ordinary income to you and the buyer amortizes it over fifteen years. A consulting arrangement signed at closing is compensation, not sale proceeds.
There is also a reporting trail. The LLC reports a Section 751(a) exchange on Form 8308, files it with its Form 1065, and must furnish the statement to you by the later of January 31 of the year after the exchange or thirty days after it receives notice. The October 2023 revision added Part IV, requiring ordinary income detail for tax years beginning on or after January 1, 2023. Notices 2024-19 and 2025-2 then gave penalty relief on the Part IV furnishing deadline, and August 2025 proposed regulations would drop that requirement for exchanges on or after January 1, 2025. Confirm where the rule stands for your filing year.
An allocation schedule is a price term wearing the clothes of an accounting exhibit. Negotiate it like a price term.
Law: 26 U.S.C. 1060; 26 U.S.C. 197(a), (d)(1)(E); 26 C.F.R. 1.1060-1; 26 C.F.R. 1.751-1(a)(3); 26 C.F.R. 1.6050K-1(c); IRS Instructions for Form 8594 (Rev. Nov. 2021); IRS Form 8308 (rev. Oct. 2023); Notice 2024-19; Notice 2025-2; proposed amendments to 26 C.F.R. 1.6050K-1 (Aug. 19, 2025).
Do state transfer or sales taxes apply if only membership interests change hands?
State transfer and sales taxes follow state law, not Revenue Ruling 99-6. Several states tax the transfer of a controlling interest in an entity that holds real property, so selling membership interests can trigger real estate transfer tax even though no deed is recorded and nothing but the interests moves. New York, Washington and Pennsylvania all reach such transfers.
New York defines a controlling interest in a non-corporate entity as fifty percent or more of the capital, profits or beneficial interest, and treats the transferring member as the grantor. Washington taxes transfers of a controlling interest, fifty percent or more measured over a thirty-six month period, in an entity owning Washington real property, and imposes that tax on the persons who previously held the interest, meaning the sellers. Pennsylvania charges one percent at the state level plus local tax and reaches real estate companies, which become acquired companies when ninety percent or more of the ownership interest transfers within three years.
Thresholds, lookbacks and rates move. Get these answered in writing for your state, dated, before the allocation schedule is fixed:
- Whether the state treats a transfer of membership interests in an entity holding real property as a taxable conveyance, at what threshold, over what period.
- Which party the statute puts the tax on, since some states impose it on the sellers.
- Whether the state charges sales or use tax on any part of the deal, and whether an interest sale changes that answer.
- What has to be re-registered anyway, since titles, permits and licenses in the LLC’s name stay there when only interests are sold.
Law: N.Y. Tax Law 1401(b), (g); N.Y. Tax Law 1402; RCW 82.45.010; RCW 82.45.033; 72 P.S. 8102-C.5.
What is the step-up worth to the buyer, and should I be paid for it?
The step-up is the buyer’s cost basis in the LLC’s assets, created by the deemed asset purchase under Revenue Ruling 99-6. It funds the buyer’s depreciation and amortization going forward. A buyer of corporate stock inherits historic basis instead, absent an election under Section 338(h)(10) or 336(e), so your LLC deal delivers something a stock purchase would not.
That is real consideration flowing to the other side of the table. Price it. An allocation shifting dollars onto recapture-heavy equipment and receivables asks you to convert capital gain into ordinary income so the buyer deducts faster. That is a negotiation, not a formality.
Whether the buyer moves on price depends on your leverage, and a one-buyer process gives you little. Run the number anyway. Note the timing mismatch too: your ordinary income lands in the year of sale, the buyer’s deductions arrive over years, which is why this belongs in the letter of intent.
Law: 26 U.S.C. 1012; 26 U.S.C. 338(h)(10); 26 U.S.C. 336(e).
What should I do before I agree to an allocation?
Model the ordinary-versus-capital split with your accountant before you sign anything that fixes the allocation, including a letter of intent referencing one. The inputs are your receivable aging, your depreciation schedule, your inventory listing and your most recent Form 1065. Negotiate from the after-tax output, not the headline price.
First steps, in order:
- Confirm how the LLC is classified federally and whether any entity election is on file. Multi-member partnership, single member disregarded, and corporate election are three different sales.
- Have your accountant run the Section 751 computation on current balance sheet figures and again on the buyer’s allocation, then compare after-tax totals.
- Pull the operating agreement and confirm what consents, rights of first refusal and transfer restrictions apply, and what the governing state’s LLC act supplies if the agreement is silent.
- Put the allocation into the letter of intent, at least as a framework. A single interested buyer is common at this size, so do not plan on rival bids moving it.
- Ask your state advisor the controlling-interest transfer tax question in writing, because these statutes change and a prior-year answer is not an answer.
One more discipline. Read the depreciation schedule before the offer; it tells you how much of your price is already ordinary income.
Tax positions in this article are stated as of July 2026.
Keep reading
The Buyer’s LibraryThe allocation schedule sets your future deductions.The Seller’s LibraryIf you still own a C corporation, an asset sale gets taxed twiceThe Buyer’s LibraryStructure decides what you buy and what you owe.
Have a lawyer read it before you sign.
A sale is decided in a handful of documents you sign exactly once — the letter of intent, the working capital definition, the indemnity. There is no rush. When you want those read properly, we are here.
Before founding Prencipe International, Joe practiced at the top law firms in the world, including Freshfields Bruckhaus Deringer, Baker McKenzie, Morgan Lewis & Bockius, and served at the U.S. Securities and Exchange Commission. He has spent his career on high-stakes disputes and transactions for businesses that cannot afford to lose. He represents owners selling the company they spent a career building -- reading the letter of intent before it is signed, and the purchase agreement while there is still room to change it.
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