We held a rental property in an LLC ( TX prop and TX LLC) for approx 4 years and now selling it. When we sell the property, how do we know the capital gains for the property. The LLC comprises of multiple partners of equal stake. (There are other properties in LLC which we will continue to hold), so LLC is going to stay.
Now when we sell this subject property, should we distribute proceeds to each partner of LLC and they handle their taxes themselves OR, should we first take the sale proceeds into the LLC which will call for capital gains tax and then distribute funds to all partners and then again they may have to pay taxes as their income for the year on the profits.
What is the best approach in such scenario. Please help/advise.
I will assume your LLC is taxed as a Partnership (i.e., you did not elect for it to be taxed as a Corporation which is rare). The LLC (being taxed as a partnership), will report the property's gain on its LLC tax return and will issue Schedule K-1's to each partner/member reflecting each partner/member's allocable share of the property's gain.
The LLC (again taxed as a partnership), will not actually pay any tax, the LLC partners/members will actually pay the tax on the property gain at their reporting level based upon what was reported to them on their respective K-1's. The property gain reported on the K-1 could be a mixture of Capital Gain, Depreciation Recapture, etc., but the LLC partnership will perform that tax calculation and report it on the LLC partner/member's K-1's.
So there will only be one level of tax. The LLC is simply the reporting mechanism to record the property's sale and to determine how much of the the resultant tax gain from the property's sale gets reported to each LLC partner/member on the Schedule K-1 issued them by the LLC.
The partnership should receive the sales proceeds (it presumably made the sale - correct?) from the disposition of the sold property. It can in turn distribute none, some or all of those cash proceeds to each partner/member so they can pay their separate tax liability based upon what they report on their tax returns. When the LLC reports the property gain the LLC partners/members will get a tax basis increase in their LLC interest for their allocable share of the tax gain they report, so any cash distributed attributable to the property sold by the LLC should not result in any additional tax liability to the LLC partners/members when distributed to them.
Thanks @Christopher Smith .