Selling a property from my llc to myself as my primary residence.

8 Replies

here is the situation...  i bought a single family house to flip, but decided to move there as my primary residence. I need to get a permant mortgage on the property now in my personal name. The current financing is a short term commercial loan.

Can I sell it out of LLC to myself at a loss? I bought it for 132K, have about 200k into it, and want to sell it to my self at a loss at 160k.

Is this legal?  What are the tax issues?

Thank you for any advise you may have.

Originally posted by @Todd Plummer :

here is the situation...  i bought a single family house to flip, but decided to move there as my primary residence. I need to get a permant mortgage on the property now in my personal name. The current financing is a short term commercial loan.

Can I sell it out of LLC to myself at a loss? I bought it for 132K, have about 200k into it, and want to sell it to my self at a loss at 160k.

Is this legal?  What are the tax issues?

Thank you for any advise you may have.

 I'm not an accountant so I could be wrong but it seems like you should be able to sell it to yourself for whatever you want to.

You are basically just deferring the taxes because when you sell it you will have to pay tax on the amount you make on top of what you bought it for from your LLC. But I guess if it your primary residence for two years the gains become tax exempt, plus you took a loss on it through your business. If it is legal it seems like a pretty good strategy.

You might want to do some research about  deducting losses and arms length transactions and see if there are any rules on that specifically because it wouldn't be an arms length transaction.

You could take the house as a distribution from the LLC. Your equity distributions do not have to be cash - they can be other assets, including real estate.

There is no profit or loss on the deal within the LLC. From a bookkeeping standpoint, you would credit the Work In Process Asset where you've been accumulating all your costs so far and debit Member Equity Draws.

Keep it simple. Doing a sale to yourself, especially at a loss, is not an arms' length transaction and the IRS would likely disallow it upon audit. This is especially true if you are a single member LLC

I'm in the same situation. I have a short term commercial loan and own the house under an llc. I've talked to several banks and have been told I have to do a refi since I own the llc. I put a big down payment and want to get that cash out but that makes the loan have a higher interest rate. @todd plummer did you do a purchase or a refi?

Anything short of full retail value seems like tax evasion. This is the reason you can’t buy a 1031 exchange replacement property from a relative. 

Imagine you had a $150k taxable gain. Instead, you sold it to yourself as a primary for $150k less than it’s worth and 2 years later sold it tax free. I assume if this wasn’t tax evasion everybody would do it.

Why not sell it to yourself for $5 and declare a tax deductible loss for the llc?

It’s probably too late now but another good reason to skip the llc in purchasing. 

You should probably ask your cpa if he’d feel comfortable doing it and defend you if an audit occurred. I wouldn’t want to face the irs with my defense being “a guy on the internet aid he thought it would be ok to not pay the taxes owed...”

Generally, you can not sell or buy an asset from yourself and recognize a gain or loss. You have not really sold the property. Assuming the LLC is a single member limited liability company, you would merely distribute the property from the LLC as a distribution to yourself as the member. It is generally a non-taxable event. There are some rare exceptions, such as a negative capital account, etc., so have your tax advisor review first.

@Bill Exeter great information! My concern was more with the loan and didn't consider the tax aspect. I want to get a loan for what I have into it. The previous appraisal puts us 75% LTV. The LLC is a partnership and the new loan will be with only one of the members so I'm not sure a distribution is okay?

My concern is when we get the new loan with a bank and make this house our primary residence, is it a new purchase or a cash out refinance?