Our company plans to sell a minority interest in a real estate asset and use the proceeds to repay existing senior debt, thereby making the asset debt-free. Since our tax basis in that transaction has been fully depreciated, advisors have suggested that we may incur substantial capital gains tax as a result. Is there a structural arrangement that would allow us to avoid paying this capital gains tax?

Regarding this transaction, there is a noteworthy detail: the entity acquiring the interest in the asset will in fact have us as the managing member, with 100% control. We have considered several options, but are not yet certain of their feasibility:

  • UPREIT structure—but the acquirer cannot be a REIT; is this structure still possible?
  • Type E recapitalization(Type E Recap)
  • Arguing that the transaction is not a "sale", thereby not triggering capital gains tax.

We hope that the experts can offer critical feedback on our above suggestions and provide other creative ideas, so that we can have preliminary discussions with our lawyers and accountants before incurring costly consulting fees. Unfortunately, due to confidentiality reasons, I cannot disclose the "why" behind our need to structure the transaction this way.