You skip the deed. You don't skip the history.
I was recently part of a team on a deal where nobody bought a building.
The buyers bought the company that owned it. Two new owners took over 100% of an LLC. The LLC stayed on title. No grant deed got recorded.
Maybe a seller is behind on a loan, or wants a fast exit, or the title is messy. Someone says, "Just buy the LLC." It sounds cleaner. Sometimes it is. But you're not buying a building anymore. You're buying a company, and everything it did before you showed up.
It took a team to get it closed. Mitch Roye of Roye Partners led the deal structuring and helped quarterback the transaction through closing, with counsel, escrow, and me on the tax side. This series covers what we worked through, from my seat as the CPA. Part 1 is the map.
One thing up front. I'm talking about an LLC that files as a partnership and has at least two owners after closing. If the seller owned it alone, or one buyer ends up with all of it, the IRS generally treats it as buying the building itself. That's a different article.
What comes with the LLC
Buy the deed and you get the property. Buy the LLC and you get the property plus the company's past: its loans, its unpaid bills, its old tax returns, and its old elections.
In our deal, the company had a loan in default and back property taxes. New owners don't make those go away. They're the company's debts, not yours personally unless you sign a guarantee. But they come out of what you just paid for. And unpaid property taxes stay a lien on the building no matter who owns the LLC.
That's why the purchase agreement matters more than in a normal sale. You want the sellers on the hook for taxes from before closing. You want them to promise they won't make elections or amend returns that hurt you. You want the books closed on the closing date so income and losses land on the right side.
Two more. If the IRS audits a year before you bought in, the bill can land on the company, which now means you. Get the sellers to cover it. And a seller's promise is only as good as their bank account, so a holdback helps.
The basis problem buyers miss
This is the part that costs buyers money years later.
The building inside the LLC still carries the seller's old, depreciated tax basis. You paid today's price and inherited yesterday's depreciation schedule.
The fix is a 754 election. With it, the company resets the building's tax basis for your share to line up with what you paid. Usually that's a step-up you can depreciate. Without it, you mostly get that value back only when you sell.
A few things to know:
- The part of the step-up that lands on the land doesn't depreciate.
- If the building is worth less than the seller's tax basis, it can work against you.
- It has to go on the company's return for the year you bought in, and once it's made it sticks for future years.
Once you own the company, you control the return. Put the election in the contract anyway, with the sellers cooperating. We did. It heads off a fight later.
Prop 13 doesn't care that you skipped the deed
Plenty of buyers assume no deed means no reassessment. California doesn't work that way.
Buying an LLC can trigger a reassessment. The common way is one person or company ending up with more than half. But depending on how the property got into the LLC, smaller shares can add up too. Splitting it 50/50 doesn't automatically keep you clear.
When it's triggered, it has to be reported to the state Board of Equalization within 90 days. Telling the county assessor doesn't count, and missing it costs a penalty.
No deed doesn't mean no transfer tax either. LA County says it collects transfer tax on LLC deals that hand over more than half the control. Some cities add their own. Part 3 covers it.
Run all of this before you sign. On a building with an old Prop 13 base, a reassessment can change the whole deal.
Not my lane, but don't skip it
The deal side worked the loan with the lender, not me. Many commercial loans let the lender call the note when ownership of the borrower changes, even if the deed never moves. That's exactly why you want the whole team at the table early.
Coming in this series
- Part 2: What you paid vs. what the building's books say, and how a 754 election works in real numbers.
- Part 3: Prop 13 and transfer taxes when you buy a company instead of a deed.
- Part 4: Closing the books: prorations, seller promises, and who files the last return.
If someone tells you to "just buy the LLC," call your CPA before you sign the purchase agreement. That's where the fixes go.
Shawn Lavi, CPA · LaviCPA · lavicpa.com. General information, not tax or legal advice. Every deal is different. Talk to your own CPA and attorney before you act.