Quit-claiming from LLC to Personal - What Taxes Should I Expect?

8 Replies

Greetings BPers,

This is a question directed more towards the accountant gurus of the crowd, or those with experience in this type of specific transaction...

I have a situation where I'll be acquiring a property via a quit-claim deed from an LLC (family member) into my personal name. The property is owned free/clear by the LLC and I will not be getting a mortgage on the property. Also, the property was bought in the LLC over 12 months ago for $95k and is now worth about $150k (fair market value).

What can I expect Uncle Sam to come knocking for....Should I expect a gift tax on my end? AND will my family member be subject to a capital gains tax since it's being sold from an LLC?

Any other surprises I may expect? Thanks!!

Sean Williams, Real Estate Agent in KY (#70813)

you dont pay the gift tax, the "donor" is responsible for paying the tax. More details would be helpful @Sean Williams .

@Steven Hamilton II Thanks so much for the input. In regards to the gift tax...does the $14,000 exclusion get deducted from the $150k market value to give you the tax basis? And any idea what the tax rate might look like, not sure if it's different per individual or not?

Sean Williams, Real Estate Agent in KY (#70813)
Originally posted by @Bryan O. :

@Sean Williams Do they own multiple properties in the LLC? Maybe you just take over the LLC and nothing changes from a tax perspective because the house doesn't change possession, the LLC just changes membership.

An LLC is a pass through entity which basically doesn't exist in the eyes of the IRS. Im not sure you can sell an LLC so to speak. You're attempting to avoid paying taxes. Maybe @Brandon Hall can weigh in. 

@Bryan O. taking over the LLC will still be considered a taxable transaction. So consideration needs to be given to the party selling the LLC interest, or the party gifting the LLC interest will file a gift tax return. Since the property's FMV is $150k, 100% of the LLC interest is worth $150k.

@Sean Williams If you are gifted $150k, the annual exclusion of $14k ($28k if the donors are married filing joint) will reduce the reportable amount. So the donor will need to file a gift tax return for any amount gifted over $14k ($28k if MFJ).

The donor will more than likely not pay gift taxes on the amount over the annual exclusion. Instead, the amount over the annual exclusion will reduce their lifetime gift exclusion (I believe it's $5.43MM for 2015). Once the donor has gifted an amount equal to their inflation adjusted lifetime exclusion, all gifts become taxable.

You should do two things: (1) get with a real estate CPA before you do anything, and (2) consider having the family member gift you, in the form of LLC interest, a value equal to the annual exclusion every year until you fully own the LLC. Or at least have them gift you a portion of the LLC this year, then wait until Jan. 1 for them to gift the remainder. This will reduce the amount needed to be reported on a gift tax form by an amount equal to the annual exclusion.

Originally posted by @Sean Williams :

@Steven Hamilton II Thanks so much for the input. In regards to the gift tax...does the $14,000 exclusion get deducted from the $150k market value to give you the tax basis? And any idea what the tax rate might look like, not sure if it's different per individual or not?

 No, the basis won't be 150k as I said in my post it will be his actual acquisition plus costs.  However, the 14k gift tax exclusion will be calculated on his gift tax return before using his exemptions.

@Brandon Hall Thanks so much for the input, this is in line with what my CPA has told me but I just wanted to double check with the BP community.

Sean Williams, Real Estate Agent in KY (#70813)