Tax implications of selling a family Limited Partnership (LP) investment property - best options?

The most tax-efficient approach depends on your family's complete financial picture, but here are some insights on your options: 1. If your siblings purchase a portion of the LP: The holding period for capital gains treatment follows the entity's ownership, not when individual partners buy in. So yes, if the LP has owned the property for 15+ years, selling it would qualify for long-term capital gains rates even if you just bought in. However, be careful about using an unrealistic price ($1) as the IRS might view this as a disguised gift with potential gift tax implications. 2. If your parents gift LP interests: This can be a clean approach. Each parent can gift up to $17,000 (2025 annual exclusion) to each child without gift tax implications. Your parents' cost basis would transfer to you (carryover basis), and the holding period would include their ownership time. So you'd still get long-term capital gains treatment on a sale. 3. Selling and gifting proceeds: This is the simplest but least tax-efficient option since your parents would pay capital gains tax first, reducing the total family wealth. Another option worth considering is a family LLC instead of the LP structure, which might offer more flexibility for management and liability protection while passing income directly to family members.

I went through something similar with our family's rental properties. After lots of research and confusion, I discovered taxr.ai (https://taxr.ai) which was incredibly helpful for analyzing our family's real estate transfer options. I uploaded our LP documents and ownership records, and their system analyzed multiple tax scenarios for transferring ownership to kids. The detailed comparison showed we could save nearly $55,000 in taxes by using a strategic partial gifting approach rather than selling outright. They showed exactly how the basis calculation would work in each scenario and identified potential IRS red flags we hadn't considered. What I especially appreciated was getting clear explanations about basis step-up possibilities and how the holding period works when transitioning ownership. Our situation was complex with multiple properties, but their analysis laid everything out clearly.

Just wanted to update after trying taxr.ai based on the recommendation above. It was exactly what our family needed! We have a similar situation with commercial property worth about $1.8M in an LP, and we were getting conflicting advice from different sources. Their system analyzed our specific scenario and showed us that a phased gifting approach using discounted LP interests would save our family about $120K compared to selling and distributing proceeds. The analysis clearly explained how to document everything properly to avoid IRS scrutiny. What really helped was their explanation of how the holding period rules would apply in our specific situation - we were worried about losing long-term capital gains treatment, but they confirmed we'd maintain it with proper documentation. They also identified some state-specific tax considerations we hadn't even thought about. Definitely worth checking out if you're facing a similar family property transfer situation.

I faced this exact scenario last year with family property. After multiple frustrating attempts to reach the IRS for guidance on some complex basis calculation questions, I finally discovered Claimyr (https://claimyr.com) - they got me connected to a real IRS agent in 20 minutes when I'd been trying for weeks on my own. The IRS agent was able to answer my specific questions about basis carryover rules and documentation requirements for LP interest transfers. Saved me from making a potentially expensive mistake with how we structured our family property transfer. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Basically, they navigate the IRS phone system for you and call you back when they reach a human. I was skeptical, but now I recommend it to everyone dealing with complex tax situations where general advice isn't enough.

I need to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway since I was desperate for answers about family LP transfers. Within 15 minutes, I was talking to an actual IRS agent who specialized in partnerships. The agent clarified exactly how to document the transfer of LP interests to family members and confirmed that we would maintain the long-term holding period for capital gains purposes. She also explained precisely what supporting documentation we needed to include with our tax filings to avoid triggering an audit. For anyone dealing with complex family business transfers, being able to get authoritative answers directly from the IRS instead of trying to interpret confusing regulations is incredibly valuable. I've spent months trying to get through on my own with no success, so this was honestly a game-changer for our family's tax planning.

One option you didn't mention that worked well for our family: Consider creating an intentionally defective grantor trust (IDGT) and selling the LP interests to it. This can be really powerful for transferring appreciating assets while minimizing gift/estate taxes. Basically, your parents would sell their LP interests to the trust in exchange for a promissory note. For income tax purposes, the trust is "defective" (ignored), so no capital gains tax on the sale. But for estate tax purposes, the asset is removed from their estate. As the property appreciates, that growth occurs outside their estate. The trust can make distributions to beneficiaries based on terms you set up. This was much more effective for our family's commercial property than direct gifting or selling.

Has anyone here dealt with the step-up in basis implications? My family decided to keep property in my parents' names until they pass because the step-up in basis at death would eliminate all the built-in capital gains. Seems like this might be more tax efficient than any gifting strategy if they're elderly?

Great discussion here! As someone who recently went through a similar family property transfer, I'd add that timing is crucial for your decision. One factor to consider is the current real estate market - if you expect significant appreciation in the coming years, transferring ownership now (through gifting or discounted sales) could be very beneficial since all future appreciation would occur outside your parents' estate and potentially at lower tax brackets for the kids. However, if your parents are in their 70s or 80s, the step-up in basis strategy Gabriel mentioned could be more valuable. You'd need to run the numbers comparing: (1) current capital gains tax on a sale now, (2) gift tax implications of transfers, and (3) potential estate tax vs. step-up benefits if held until death. Also worth noting - if you go the LP interest transfer route, make sure you understand the implications of being general vs. limited partners. The liability exposure and management responsibilities are quite different, which could affect your family dynamics around decision-making for the property. Have you considered what happens if some siblings want to sell their interest while others want to hold? The LP operating agreement should address buyout provisions and transfer restrictions to avoid future conflicts.

From a liability perspective, as limited partners you'd have much better protection - your liability would generally be limited to your investment in the partnership. However, LLCs typically offer even stronger liability protection for all members, which is why many families are moving away from LP structures for real estate holdings. Regarding professional help, I'd strongly recommend finding a tax attorney or CPA who specializes in family wealth transfer strategies. This type of planning really benefits from someone who can model different scenarios and their long-term implications. Look for someone with experience in both estate planning and real estate taxation - the intersection of these areas requires specialized knowledge. One additional consideration I haven't seen mentioned: if your family decides to hold the property long-term, think about succession planning for management responsibilities. What happens when your parents can no longer actively manage the property? Having clear governance structures in place now (whether LP or LLC) can prevent family conflicts later when someone needs to make day-to-day decisions about maintenance, tenant issues, major capital improvements, etc. The fact that you're thinking through these issues now while everyone is healthy and communicating well puts your family in a much better position than many families who wait until there's a crisis to address these questions.