Two ways. Sell the building (the asset) and the LLC remains in existence holding the cash proceeds. Or sell the LLC interest (the equity) and the LLC continues to own the building but with new members. The two structures look similar from the outside and produce very different outcomes on tax treatment, transaction friction, buyer pool, and the seller's post-close obligations. The choice between them is one of the more consequential decisions an LLC-owning seller makes, and it is often made by default rather than by analysis.
For most LA multifamily LLCs holding a single building, the default is an asset sale — the LLC sells the building, distributes the proceeds to members, and the LLC dissolves or continues as a holding entity for the proceeds. The asset sale is the simpler structure and the one buyers usually prefer. The interest sale (entity sale) becomes worth considering in a narrower set of situations.
The LLC executes the sale as the seller of record. The grant deed conveys title from the LLC to the buyer. The LLC receives the sale proceeds, pays off any existing debt, and distributes the net proceeds to its members per the operating agreement.
What's involved:
What the buyer gets:
The asset sale is operationally clean and tax-efficient for the buyer. It is the default for almost every LA multifamily LLC sale.
The members of the LLC sell their LLC membership interests to the buyer. The LLC continues to exist with its assets, liabilities, and tax attributes intact; only the ownership has changed. The buyer steps into the existing structure as the new member or members.
What's involved:
What the buyer gets:
The carryover-basis issue is the dominant reason interest sales are unusual in LA multifamily. A buyer paying $5M for an LLC that owns a building with $1.5M in tax basis takes the building at $1.5M basis, not $5M basis — meaning the buyer's annual depreciation deduction is dramatically lower than it would be in an asset sale. For most buyers, this is a deal-breaker.
Despite the buyer's general preference for asset sales, interest sales are sometimes the right structure.
The LLC has substantial favorable contracts or rights that don't transfer cleanly in an asset sale. A long-term ground lease, a favorable property management contract, a development rights agreement, a Section 8 HAP contract, or a regulatory entitlement that would require new approvals in an asset sale but transfers automatically in an interest sale.
Tax considerations specific to the seller. Some sellers have specific tax planning reasons to retain the LLC structure post-sale, including foreign-investor structures, family-trust holdings, or coordinated multi-entity strategies. The interest sale preserves the structure; the asset sale collapses it.
Transfer tax avoidance. California documentary transfer tax is calculated on the real estate transfer in an asset sale. An LLC interest sale where less than 50% of the interests change hands often does not trigger the documentary transfer tax, because no real estate transfer is recorded. This was historically a meaningful planning tool. Recent enforcement and statutory tightening (particularly under Los Angeles County Assessor practices) have reduced but not eliminated the opportunity. The analysis depends on the specific transfer structure, the county, and current case law — a tax counsel review is required.
Buyer is structurally a continuation of the existing operation. When the buyer is already an affiliate of the existing members (e.g., a recapitalization, a partnership restructuring), the interest sale preserves continuity that an asset sale would unnecessarily disrupt.
Step-up planning at the buyer's death. A buyer who plans to hold the LLC interest to death may not care about the carryover basis problem, because the heirs will get a stepped-up basis at the buyer's death anyway. The buyer's lifetime depreciation is suboptimal but the inheritance is clean.
A 1031 exchange by an LLC is fully available. The LLC is the taxpayer for federal tax purposes (in most cases — single-member LLCs are disregarded for tax purposes and the member is the taxpayer). The exchange is structured at the LLC level: the LLC sells the relinquished property, the qualified intermediary holds the proceeds, and the LLC acquires the replacement property.
The complication arises when different LLC members want different things on the back end of the sale. Member A wants to 1031 and continue holding real estate; Member B wants to cash out and pay tax; Member C wants to retire. The LLC cannot 1031 part of its proceeds and distribute the rest as cash to one member — the structure has to treat the entire proceeds the same way.
The standard solution is the drop-and-swap — before the sale, the LLC distributes tenancy-in-common interests in the building to each member pro-rata. Each member then independently decides whether to 1031 their tenancy interest or sell it for cash. The mechanics work but the IRS has historically scrutinized drop-and-swap structures for adequate substance and timing. The drop has to be executed well in advance of the sale (commonly six months or more, though the precise timing is judgment-dependent).
A drop-and-swap that is well-planned and well-executed is a routine tax structure. A drop-and-swap that is rushed at the last minute is a high-risk position. Sellers contemplating different post-sale paths among members should engage tax counsel early in the sale process — ideally before the listing date.
For an LLC selling a building (asset sale), the buyer's diligence typically includes:
For an interest sale, the documentation is substantially deeper — the buyer is effectively taking over the LLC and needs full insight into the LLC's historical activities, contracts, tax positions, and liabilities. Interest-sale diligence typically takes 60 to 90 days, compared to 30 to 45 days for asset-sale diligence.
Start with the default of an asset sale unless there's a specific reason to consider an interest sale. The interest sale's complications are real, the buyer pool willing to engage with it is narrower, and the tax mechanics on the buyer's side usually produce a lower realized price. For most LA multifamily LLCs, the asset sale produces the best net outcome.
When member dynamics are complicated — different members wanting different post-sale paths, particularly different 1031 choices — engage tax counsel before listing. The drop-and-swap structure, properly executed, accommodates this. The drop-and-swap, improperly executed, can collapse the tax planning for everyone involved.
The other thing I tell LLC sellers is to ensure the operating agreement is current and unambiguous on sale authority. A sale that requires a supermajority vote when the operating agreement is silent on the threshold creates unnecessary friction. Cleaning up the operating-agreement provisions on sale authority before the listing date prevents one of the more common pre-close delays.
The LLC structure is a vehicle. Selling the vehicle (interest sale) and selling what the vehicle holds (asset sale) are different transactions producing different outcomes. The default is asset sale, the exceptions are well-defined, and the choice between them should be made on the merits rather than by inertia. Sellers who think about this before listing have cleaner sales. Sellers who think about it after the buyer asks have rushed structural decisions in escrow.
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Michael Sterman is Senior Managing Director Investments at Marcus & Millichap, specializing in Los Angeles multifamily transactions.
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