Capital Gains tax within a 3 person LLC
Rental Property Investor · Lexington, KY · Member since 2015 · 41 posts · 15 votes
Capital Gains tax within a 3 person LLC
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesQuote from @Blaine Cox:
If I am part of a 3 person LLC and we are flipping a property. How can we set aside capital gains tax to be able to individually have what we need come tax time? This will be a less than 12 month flip.
For example: If we clear $50,000 after fees, commission, etc and if the capital gains tax is 24% ($12,000) do we set aside the $12,000 as a company and come tax time take from that as far as what each of our portions may be? We each have a different percentage of ownership within the LLC. Also, how is the capital gain percentage determined within an LLC (22%, 24%, 32%...... etc).
Thank you to anyone in advance!
Things work very differently from what you think. To understand it and, more importantly, to prepare, the three of you would benefit from a professional consultation. That said, here're some pointers to start:
- Your LLC does not owe and does not pay any taxes. The partners do. Accordingly, the company cannot set aside any money for taxes, it's on the partners.
- The amount of taxes due entirely depends on your respective personal tax situations. If all 3 of you owned exactly 1/3 of the LLC (I know it's not your case), each of you would be allocated exactly 1/3 of the profit. However, each of you would owe a different amount of taxes on your respective shares. One of you might owe twice as much as the other, and your LLC has nothing to do with it - it's all on your personal sides.
- Trying to have the LLC compensate partners for their respective (and uneven!!!) tax liabilities is wrong business-wise. Not to mention that it is also wrong for tax reasons.
- You call it capital gain taxes, but it is not. It will be an ordinary business income.
- The LLC will almost certainly need to keep records as a partnership and file a partnership tax return. This is complicated and not cheap. The LLC should be paying for the bookkeeping and tax compliance of the LLC (as opposed to your personal tax preparation.)
9 Replies
- 8moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Blaine Cox:
If I am part of a 3 person LLC and we are flipping a property. How can we set aside capital gains tax to be able to individually have what we need come tax time? This will be a less than 12 month flip.
For example: If we clear $50,000 after fees, commission, etc and if the capital gains tax is 24% ($12,000) do we set aside the $12,000 as a company and come tax time take from that as far as what each of our portions may be? We each have a different percentage of ownership within the LLC. Also, how is the capital gain percentage determined within an LLC (22%, 24%, 32%...... etc).
Thank you to anyone in advance!
Things work very differently from what you think. To understand it and, more importantly, to prepare, the three of you would benefit from a professional consultation. That said, here're some pointers to start:
- Your LLC does not owe and does not pay any taxes. The partners do. Accordingly, the company cannot set aside any money for taxes, it's on the partners.
- The amount of taxes due entirely depends on your respective personal tax situations. If all 3 of you owned exactly 1/3 of the LLC (I know it's not your case), each of you would be allocated exactly 1/3 of the profit. However, each of you would owe a different amount of taxes on your respective shares. One of you might owe twice as much as the other, and your LLC has nothing to do with it - it's all on your personal sides.
- Trying to have the LLC compensate partners for their respective (and uneven!!!) tax liabilities is wrong business-wise. Not to mention that it is also wrong for tax reasons.
- You call it capital gain taxes, but it is not. It will be an ordinary business income.
- The LLC will almost certainly need to keep records as a partnership and file a partnership tax return. This is complicated and not cheap. The LLC should be paying for the bookkeeping and tax compliance of the LLC (as opposed to your personal tax preparation.)
- 8moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 899 votes
I agree with Michael. Things don't work quite the way you're thinking. An LLC itself doesn't pay income taxes or "set money aside" for taxes — the tax liability flows through to the individual partners. Because of that, each owner is responsible for their own tax bill based on their personal tax situation, even if profits are split evenly. Two partners can receive the same share of income and still owe very different amounts in tax, and that difference isn't something the LLC should try to correct or equalize.
Trying to have the LLC reimburse or compensate partners for their personal tax liabilities is generally a bad idea, both from a business perspective and a tax perspective. It also sounds like what's being referred to as capital gains here would more likely be treated as ordinary business income, not capital gains. On top of that, a multi-member LLC will almost certainly be treated as a partnership for tax purposes, which means separate bookkeeping and a partnership tax return, along with the related compliance costs.
Malabute & Company CPAs525 Reviews - Rental Property Investor · Lexington, KY · Member since 2015 · 41 posts · 15 votes8mo
@Jason Malabute
Thank you for the response. I think I may be starting to understand but maybe not. Ha!
So for easy purposes again if we as the LLC flip a house and net $50,000, if my percentage of ownership in the LLC is 20% would my K1 show $10,000.00 in income to me which would be added to my overall income? So if I make $150,000.00 per year would that now put me at $160,000.00 for 2026 and I would be taxed according to the tax bracket I'm in?
I just know other investors who set aside 24% of each flip so when April comes around they have the funds to pay the taxes they will owe.
- 8moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Blaine Cox:
@Jason Malabute
Thank you for the response. I think I may be starting to understand but maybe not. Ha!
So for easy purposes again if we as the LLC flip a house and net $50,000, if my percentage of ownership in the LLC is 20% would my K1 show $10,000.00 in income to me which would be added to my overall income? So if I make $150,000.00 per year would that now put me at $160,000.00 for 2026 and I would be taxed according to the tax bracket I'm in?
I just know other investors who set aside 24% of each flip so when April comes around they have the funds to pay the taxes they will owe.
The general concept is correct. Whether or not it will be 24% of the $10k is unknown, it depends on a lot of factors.
- 8moBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
You may want to have the LLC make a distribution by March 15th in an amount around 25%(can be less or more) of the profits. the remaining 75% can be put back into the LLC by investing more into the next deal.
I.E. if the partnership made $50,000
25% of $50,000 is $12,500
Distribute $12,500 to the partners based on their partnership agreement.
Basit Siddiqi CPA4.979 Reviews - Accountant · Columbus, OH · Member since 2024 · 27 posts · 19 votes8mo
Quote from @Blaine Cox:
If I am part of a 3 person LLC and we are flipping a property. How can we set aside capital gains tax to be able to individually have what we need come tax time? This will be a less than 12 month flip.
For example: If we clear $50,000 after fees, commission, etc and if the capital gains tax is 24% ($12,000) do we set aside the $12,000 as a company and come tax time take from that as far as what each of our portions may be? We each have a different percentage of ownership within the LLC. Also, how is the capital gain percentage determined within an LLC (22%, 24%, 32%...... etc).
Thank you to anyone in advance!
Hi Blaine,
Since you are in the business of buying/selling homes, the property is considered inventory and not a capital asset. Like others have said, the tax varies from partner to partner and would be taxed at ordinary rates.
It seems like you would benefit from working with a tax professional. Someone who knows how to navigate various state/local filings since you could be doing business in various localities. - Rental Property Investor · Lexington, KY · Member since 2015 · 41 posts · 15 votes8mo
Thank you all for the answers. Highly appreciated.
- 8moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Michael is right, especially on the big picture points.
Since it’s a flip held under 12 months, the profit is taxed as ordinary business income. That’s an important distinction because it changes how it’s taxed.
The LLC itself doesn't pay the tax. The income flows through to each of you based on your ownership percentages, and you each pay tax on your share at your own personal tax rate. That's why there isn't a single 24 percent number. One partner might be in the 22 percent bracket, another in the 32 percent bracket, depending on their overall income.
Because of that, the company shouldn’t be trying to set aside or “true up” taxes for each partner. The clean approach is to distribute profits per the operating agreement and have each partner set aside their own tax money.
Some LLCs do a standard tax distribution, like 25 or 30 percent of profits, to help everyone cover taxes, but it still goes out proportionally. It doesn’t adjust for who owes more or less.
Also keep in mind this income may be subject to self-employment tax depending on how the LLC is structured and who's active.
This is a good one to run past a CPA before closing so everyone knows what to expect and there are no surprises later. Goodluck, and Happy to Connect!
INVESTOR FRIENDLY CPA®5241 Reviews - CPA| New Clients Welcome| 50 States · Member since 2016 · 430 posts · 93 votes8mo
@Blaine Cox, hi. In most flips, the LLC doesn't pay the tax, the profit passes through to each member based on ownership, and each partner pays tax at their own individual rate. A common approach is to set aside estimated taxes at the LLC level when the deal closes, then distribute the remainder, with final true-ups at tax time. Since this is a sub-12-month flip, the gain is usually taxed as ordinary income (and may be treated as dealer activity), which is why planning reserves up front is key to avoiding surprises.
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