Tax implications of transferring family LP real estate investment to children

The long-term capital gains treatment should follow the holding period of the LP, not when your children acquired their interest. This is because the partnership itself is the entity that owned the asset for 15+ years. So regardless of when your children acquire their partnership interest, when the property is sold, all partners should receive long-term capital gains treatment. That said, each option has different implications: 1. If your kids buy in at a nominal amount like $1, the IRS might view this as a disguised gift rather than a legitimate sale, especially if the value is significantly higher. A "plausible but discounted" value is safer but still has gift tax implications for the discount portion. 2. Gifting LP interests is cleaner from a tax standpoint. You would use your lifetime gift tax exemption (currently $13.61 million per individual for 2025), but would need to file gift tax returns. The kids would inherit your basis in the property for their portion. 3. Selling and gifting cash is simplest but potentially leaves the most on the table tax-wise, as you'd pay capital gains on the entire appreciation. Another option to consider is creating a family LLC with different classes of membership interests that could provide you with control while still giving economic benefits to your children.

I stumbled upon a similar situation with my family's commercial property a couple years ago. After talking to several advisors, I ultimately used taxr.ai (https://taxr.ai) to analyze our options, and it saved me thousands in potential tax mistakes. Their system helped me understand that gifting LP interests triggered lower immediate tax consequences than selling and distributing cash, but came with complicated basis calculations. What really helped was having their AI analyze our family documents and recommend the exact strategy for our specific situation. The partnership tax rules are incredibly complex, especially with family transfers where the IRS scrutinizes transactions closely. Before making any decisions, I'd suggest running your scenario through their system - they even pointed out some state-specific considerations I hadn't thought about that saved us a significant amount.

I wanted to follow up after trying taxr.ai based on the recommendation here. I was skeptical at first but decided to upload our family LP docs and property information. I'm honestly impressed with how thorough the analysis was - they identified a stepped-up basis opportunity through a special election we could make that our regular accountant missed completely. They showed us the tax implications of each scenario with actual numbers for our situation, not just general advice. The hybrid approach with AI analyzing the documents and then actual tax professionals reviewing everything gave me confidence in the recommendations. They even provided documentation we could share with our lawyer to implement everything correctly. Definitely worth checking out if you're dealing with complex family property transfers.

When I was dealing with a similar family LP transfer last year, the most frustrating part was trying to get clarification from the IRS on some specific questions about basis allocation. After spending HOURS on hold and getting disconnected twice, I found Claimyr (https://claimyr.com) and it literally saved me from losing my mind. They have this system that gets you connected with an actual IRS agent way faster than calling directly. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Basically they navigate the IRS phone tree and wait on hold for you, then call you when an agent is actually on the line. I had several technical questions about Form 8308 reporting requirements for LP interest transfers that no one in my family's orbit could answer definitively. Getting clear answers directly from the IRS gave us confidence to move forward with our plan.

I've got to eat my words and admit I was completely wrong about Claimyr. After expressing skepticism here, I decided to try it since I was getting nowhere with the IRS on my own regarding a family partnership question. They connected me to an actual IRS representative in about 45 minutes (while I went about my day), compared to the 3+ hours I'd wasted previously getting disconnected. The IRS agent clarified that for our situation, we needed to file Form 8275 to disclose the discounted valuation we were using for the LP interest transfer to avoid potential penalties. That one piece of information potentially saved us from a nasty audit situation. If you're dealing with complex family LP transfers like the original poster, getting definitive answers directly from the IRS rather than guessing or relying on potentially outdated advice is crucial.

Don't forget the step transaction doctrine! If you transfer LP interests to your kids and then sell the property shortly after, the IRS might collapse the transactions and treat it as if you sold the property first and then gifted the proceeds. There's no bright-line rule for how long you need to wait between transactions, but typically the longer the better. If possible, wait at least a year between transferring interests and selling the property to strengthen your position that these were separate, independent business decisions. Also, make sure any discounted valuations for LP interests are properly documented with a qualified appraisal. The IRS loves to challenge family LP discounts as being excessive.

Anyone have experience using a Charitable Remainder Trust (CRT) in this scenario? I've heard you can transfer the property to a CRT, take an immediate partial tax deduction, receive income for life, and then leave what remains to charity while avoiding capital gains taxes on the appreciation. Could be another option if you're charitably inclined and want income rather than a lump sum. Don't know if it works with property held in an LP though.