Sell the LLC Interest — When Structure Matters More Than Price
Some LA multifamily transactions don't close as sales of buildings. They close as sales of LLC or partnership interests in the entity that owns the building. The two structures produce legally and economically different outcomes — and for certain sellers, specifically the ones holding through older entities with multiple partners or decades of compounded basis, the difference is material. This is the part of the transaction most sellers never hear about because it rarely applies and requires counsel to execute.
In a traditional asset sale, the seller transfers title to the property. Property tax reassesses on transfer. Transfer tax is owed. The buyer steps up basis on the building. In an LLC-interest sale, the seller transfers their membership interest in the entity that owns the property. The building does not change hands — the entity that owns it simply has a new member. Depending on the specific structure and the percentage transferred, property tax reassessment may or may not trigger. Transfer tax treatment depends on specific jurisdictional rules and the transaction structure. This is not a loophole — it is a legitimate structural alternative that works for specific situations.
Preservation of favorable tax basis for the entity. The building's tax basis at the entity level may be substantially higher than the seller's personal basis. Structuring as an entity-interest sale can preserve that position for certain tax analysis purposes.
Partial transfers on multi-owner entities. If a building is owned by a partnership where one partner wants to exit and the others want to continue holding, an interest sale of just the exiting partner's share is often cleaner than a forced full-building sale.
Potential property-tax reassessment management. California's change-in-ownership rules are specific and narrow. A partial interest transfer below the threshold does not trigger reassessment. A seller holding alongside partners, transferring less than 50% of total interest, may avoid the reassessment that a full sale would trigger.
Entity-interest sales import the entity's full history. The buyer inherits the entity's prior operations, its tax filings, its potential historical liabilities, and any litigation exposure accumulated over the ownership period. Most institutional buyers will not purchase entity interests for this reason. The risk of inherited liability is too broad to diligence fully. Asset sales are preferred because they isolate the asset cleanly. Family offices and experienced private buyers sometimes will accept entity interests — particularly on long-held entities with clean operations — but only after extensive legal diligence that adds cost and time to closing.
Where they do happen, LLC-interest sales generally involve:
A detailed representations-and-warranties package where the seller stands behind the entity's operations to a specific date and specific exposure cap. A purchase price that reflects the buyer's diligence burden — often modestly below what an asset sale would produce, because the buyer is absorbing inherited-liability risk. Escrow and insurance provisions that cap or cover specific exposures identified during diligence. Specialized legal counsel on both sides. This is not a standard transaction.
Multi-partner entities with one exiting owner. The cleanest use case — specifically a partial transfer that maintains entity continuity for remaining partners.
Entities with complex prior-period operations that cannot be cleanly disentangled. Some older multifamily entities have decades of partnership layers, related-party transactions, and accumulated positions that are simpler to transfer whole than to unwind for a clean asset sale.
Specific tax-planning situations identified by the seller's CPA. When the entity-level analysis is the driver.
For a single-owner LLC selling a straightforward building, asset sale is almost always the right structure. The entity path creates complexity, narrows the buyer pool, and often produces a worse net outcome than the straightforward asset sale.
Most LA multifamily transactions are asset sales. Brokers who tell every seller "consider an entity sale" are usually giving generic advice without building-specific basis. The right conversation starts with the specific entity structure, the specific partner composition, the specific tax basis, and the specific CPA's recommendation — and determines whether the entity path is even applicable, much less preferable.
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Michael Sterman is Senior Managing Director Investments at Marcus & Millichap. This is informational, not legal or tax advice — consult specialized counsel before pursuing any entity-interest transaction.
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