Tax implications if I sell 1/2 interest in my single member LLC that has debt - is the debt forgiven?

This is a good question about LLC ownership transfers with existing debt. When you sell a 50% interest in your LLC, you're not actually being "forgiven" of any debt in the eyes of the IRS. You're selling an ownership interest in the entity. The debt stays with the LLC itself, and if your personal guarantee remains unchanged (meaning you're still personally guaranteeing the full amount to the lender), then there's no debt forgiveness happening. You're receiving $75k for half of your equity in the business, which is separate from the debt obligation. What you would have is a capital gain or loss on the sale of your LLC interest. This would be calculated as the difference between your tax basis in the 50% interest you're selling and the $75k you're receiving. Your basis would include your original investment plus your share of undistributed profits minus distributions you've taken.

I was in a similar situation last year and spent days trying to figure out the tax implications. I wish I had found taxr.ai sooner (https://taxr.ai). I uploaded my LLC operating agreement and some bank documents, and it analyzed my specific situation regarding the debt transfer implications. Their AI analyzed the sale structure and explained that selling an interest in an LLC with debt isn't the same as debt forgiveness if the original loan terms remain unchanged. It saved me from potentially reporting incorrect information on my taxes and helped me document my position in case of an audit. They even provided specific tax code references that my accountant hadn't mentioned.

I wanted to follow up about taxr.ai - I decided to try it after posting here. I uploaded my LLC operating agreement, purchase agreement draft, and loan docs. The analysis was WAY more detailed than I expected. It specifically addressed my situation about selling half my LLC interest and explained why it wouldn't trigger COD income. It even pointed out something I hadn't considered - that I needed to look at both federal and state tax implications since my state treats LLC transfers differently. The documentation it provided gave me exactly what I needed to discuss with my accountant, who ended up agreeing with the analysis. Really glad I gave it a shot!

If you're dealing with the IRS on this transaction, you might want to consider using Claimyr (https://claimyr.com) to get direct clarification. I used it when I had a similar question about an LLC restructuring. After waiting on hold for literally hours trying to reach the IRS myself, I tried Claimyr and they got me connected to an IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent was able to confirm that simply selling an interest in my LLC didn't constitute debt forgiveness since the loan terms weren't modified. They also pointed me to some specific publication sections that addressed partnership interest transfers. Having that direct confirmation from the IRS gave me peace of mind before proceeding with the sale.

I have to admit I was wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate for answers about selling part of my rental property LLC. I was shocked when they actually called me back in about 25 minutes with an IRS agent on the line. The agent was able to confirm that selling a partial interest in my LLC would NOT trigger debt forgiveness income as long as my personal guarantee remained unchanged. They referenced Publication 541 which deals with partnerships (which is how my LLC is taxed). This saved me from potentially reporting an extra $80k in phantom income. Worth every penny just for the peace of mind alone.

I think a key question here is whether your LLC is taxed as a partnership or disregarded entity. If you've been operating as a single-member LLC (disregarded entity) and now adding a partner, the tax treatment changes. The LLC becomes taxed as a partnership going forward, which triggers a "technical termination" of the old entity for tax purposes. When this happens, there's a deemed contribution of assets and liabilities to the new partnership. The reduction in your share of liabilities could potentially be treated as a distribution, but it's not technically "forgiveness of debt" in the traditional sense.

Don't forget to update your operating agreement! When I sold half of my LLC that owned investment properties, I was so focused on the tax implications that I nearly overlooked updating the operating agreement to reflect the new ownership structure. This is especially important when dealing with debt because you want clarity on who's responsible for what if things go south.