I have an LLC created to develop a subdivision where one other member contributed land to the LLC in two separate transctions (one of $481,963 representing land we developed and another of $188,734 for land to be developed in the future) creating a capital account of $681,689. A dispute arose and that member wanted out the LLC and the land ($188,734) to be developed in the future was deeded back to him and he transferred his interest in the LLC to us and waived any rights to the land valued $481,963 previously contributed. Now my problem. To remove his equity interest I debited his capital account $481,163 and credited the asset account associated with the lots in the development and credited his capital account $188,734 for the land deed back to him and debited the asset account associated with the land for future development. When preparing the 1065 this creates a K-1 to him for 681,689 which he is not at all happy about and frankly I'm not sure is correct. Anyone have any ideas?

I once worked for an S corp that did goofy stuff like this and made me bonkers. It's a bit late for me to be thinking about this, so I'll think upon it and maybe be back to it later, if someone else doesn't beat me to it. In the meantime I can tell you this:

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To remove his equity interest I debited his capital account $481,163 and credited the asset account associated with the lots in the development

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You said he waived his rights to this land, meaning the company still owns it? If so, you can't credit it out of the asset account cause you still have it.

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and credited his capital account $188,734 for the land deed back to him and debited the asset account associated with the land for future development.

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That's backwards.

The rest of the issue is what I'm too tired to think about, but that's a start. Also, is there any income/loss attributed to him during the time he was in? You didn't really say what happened between his investment, and getting back out of it.

OK, I'm awake now. :-)

Backing up a sec, in terms of making entries into the books, don't worry about recording each piece of property separately in terms of the equity. That is, if a piece of property went back to this partner, then that obviously has to come off the books. The company doesn't own it anymore, so it's no different than getting rid of any other asset for any reason - it comes off the books.

But from the equity side, it doesn't matter what asset(s) the retiring partner gets. From that standpoint, an asset is an asset. He could have as easily gotten cash in that same amount and from the equity side it would be the same thing.

You've skipped a lot of steps. Technically you should be "catching up the books" before doing this. In the end, it won't affect that this partner is leaving with the value of the one property because that's what he's agreed to do. It will, however, change his equity value and therefore the difference of that and the land value.

You should re-value all assets, and catch up revenue/expense stuff, and split all that up in the agreed-upon manner to update the equity accounts. That would change his equity value. It won't change that he isn't taking his actual share. However, if the value of the land changed, it changes the value of what he is taking in assets. It also changes the difference between what he put in and what he's taking back out (his loss), and it's also changing the valuation of the partners that are left.

Once that is done, you can treat the difference between what his portion of equity is and the value of the land he took back, and make that a bonus to the remaining partners. That is, take that difference and apply it to the remaining parnters' equity accounts in whatever your income sharing ratio is. And do that as one entry and stop trying to treat the two separate pieces of land as having significance to the equity.

Just to make it simple, if his total capital at the time of leaving was $600,000 and he chose to take something worth $200,000, that leaves $400,000 as bonus. Then if there's two partners left who split income evenly, they get $200,000 each of that. So the entry becomes:
Dr Retiring partner equity 600,000
Cr Undeveloped land he's taking back 200,000
Cr Remaining partner 1 equity 200,000
Cr Remaining parnter 2 equity 200,000

Noticed the developed land you're keeping isn't involved in that. And I'm not even meaning to round it off to $400,000 and look at that as the bonus. I'm meaning to say the land he takes back is re-valued at $200,000 and after applying other re-valuations and any income/loss, his equity just happens to balance out to $600,000. And that $600,000 is split in the credits between the land he's taking back which has to be removed from the books, and the bonus split to the others.

Technically all that work should be done. His share of income/loss will carry through to his taxes. The bonus difference is a loss. But if he turned around and left fairly quickly, before anything really ever even happened, you could skip that complication. Otherwise, you're getting too hung up on just the land and not taking into consideration what happened between the time he came and the time he left.