Father and son are 50/50 limited partners in a real estate LLC. The original mortgage was $3.5M. The new mortgage is $7M. Consequently, they had an additional $3.5M cash out above our mortgage account.
Before the cash out each partner had an ending capital account of $1.1 million (total $2.2 million) and each partners’s share of liabilities (non recourse debt) was $1.7 million (total of $3.4 million)
If the partners distribute the $3.5 million to themselves, ($1.75 each), does the $1.75 go against their basis, their share of debt or both? Does this trigger a gain? Can they add the 3.5 million distributed to their share of nonrecourse debt since the LLC is still responsible for paying it?