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Tax, SDIRAs & Cost Segregation

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David G West
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Cap Gains on Re-entering ownership

David G West
  • New to Real Estate
  • Seal Beach, CA
Posted Mar 25 2024, 12:44

Hi,

We bought a property last year thru an LLC and the previous owner was there for 2 years so he sold it with no capital gains.
For various reasons, we are partnering with the previous owner again and adding him as a partial-owner of the LLC and therefore the property. 
How would that affect his tax situation if at all?

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Chris Seveney
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Chris Seveney
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Replied Mar 25 2024, 14:02
Quote from @David G West:

Hi,

We bought a property last year thru an LLC and the previous owner was there for 2 years so he sold it with no capital gains.
For various reasons, we are partnering with the previous owner again and adding him as a partial-owner of the LLC and therefore the property. 
How would that affect his tax situation if at all?


 Not a CPA, but I would never give anyone tax advice. Even if someone on BP told you "this is what I think", I would not tell him that, I would advise him he needs to talk to his accountant. 

Now I do want to throw what my guess is out there, which is since he sold the property last year he is now buying into the LLC which owns the property, he cannot take his old basis or use this type of exemption. I also do not believe an LLC can use the 2 year capital gain clause as it would not be considered owner occupied.

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Zachary Jensen
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Zachary Jensen
Tax & Financial Services
#4 Tax, SDIRAs & Cost Segregation Contributor
  • Accountant
  • San Diego, CA
Replied Mar 25 2024, 15:54
Quote from @David G West:

Hi,

We bought a property last year thru an LLC and the previous owner was there for 2 years so he sold it with no capital gains.
For various reasons, we are partnering with the previous owner again and adding him as a partial-owner of the LLC and therefore the property. 
How would that affect his tax situation if at all?


The first statement "he sold it with no capital gains" is a bit worrying, do you mean he used section 121 exclusion for the capital gains he incurred selling a primary residence? 

The act of making him an owner in your LLC has tax implications, but I don't know enough about the situation to say which ones. If your concern is that he will owe some of his gains back or something, that should not be the case. Please share more information on this and always consult with your accountant!

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David G West
  • New to Real Estate
  • Seal Beach, CA
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David G West
  • New to Real Estate
  • Seal Beach, CA
Replied Mar 25 2024, 19:08
Quote from @Zachary Jensen:
Quote from @David G West:

Hi,

We bought a property last year thru an LLC and the previous owner was there for 2 years so he sold it with no capital gains.
For various reasons, we are partnering with the previous owner again and adding him as a partial-owner of the LLC and therefore the property. 
How would that affect his tax situation if at all?


The first statement "he sold it with no capital gains" is a bit worrying, do you mean he used section 121 exclusion for the capital gains he incurred selling a primary residence? 

The act of making him an owner in your LLC has tax implications, but I don't know enough about the situation to say which ones. If your concern is that he will owe some of his gains back or something, that should not be the case. Please share more information on this and always consult with your accountant!


 Great point, yeah he took advantage of sec 121. 
He's aware there is likely a tax implication on the income of the LLC but main concern is if becoming a part owner would affect his eligibility for capital gains exemption thru 121.

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Zachary Jensen
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Zachary Jensen
Tax & Financial Services
#4 Tax, SDIRAs & Cost Segregation Contributor
  • Accountant
  • San Diego, CA
Replied Mar 26 2024, 07:00
Quote from @David G West:
Quote from @Zachary Jensen:
Quote from @David G West:

Hi,

We bought a property last year thru an LLC and the previous owner was there for 2 years so he sold it with no capital gains.
For various reasons, we are partnering with the previous owner again and adding him as a partial-owner of the LLC and therefore the property. 
How would that affect his tax situation if at all?


The first statement "he sold it with no capital gains" is a bit worrying, do you mean he used section 121 exclusion for the capital gains he incurred selling a primary residence? 

The act of making him an owner in your LLC has tax implications, but I don't know enough about the situation to say which ones. If your concern is that he will owe some of his gains back or something, that should not be the case. Please share more information on this and always consult with your accountant!


 Great point, yeah he took advantage of sec 121. 
He's aware there is likely a tax implication on the income of the LLC but main concern is if becoming a part owner would affect his eligibility for capital gains exemption thru 121.


 I see what your saying. I don't see how it would.