Selling to LLC for Capital Gains Exception

6 Replies

I have a rental that I lived in for two years. It has been a rental the last two years and I plan to sell it soon in order to take the capital gains tax exempt. However, I would like to keep it if possible. I have formed an LLC for future real estate investment. Can I "sell" it to my LLC at current market value with a quit claim deed and take the capital gains tax exempt?

Originally posted by @Zachary Bohn :

@Brendan Scully I believe there may be an exception that related party sales aren't available for the exclusion 

 Actually that is not entirely correct. There is some case law that does allow for such a sale. There is a provision for doing so; however, the specifics are fairly complex.  In addition it would require the use of a separate corporation. And corporations are not the best entity for holding rentals.  

Originally posted by @Brendan Scully :

I have a rental that I lived in for two years. It has been a rental the last two years and I plan to sell it soon in order to take the capital gains tax exempt. However, I would like to keep it if possible. I have formed an LLC for future real estate investment. Can I "sell" it to my LLC at current market value with a quit claim deed and take the capital gains tax exempt?

Not an LLC, especially if it's disregarded entity. It can be sold to an S-Corp. The residence can then be rented inside the S corporation and depreciated at the stepped up fair market value basis. The residence is effectively retained with no current tax cost because the gain on the sale is excluded under IRC Sec. 121 (provided all the requirements of IRC Sec. 121 are satisfied)In Ltr. Rul. 8350084, the IRS ruled that the sale of a residence to a wholly owned corporation of the taxpayer qualified for the former section 121( Section 1034) gain deferral. In that ruling, the IRS stated that there was no prohibition in the Section 1034 rules against selling the residence to a related party and excluding (deferring) the gain. The authors believe this same rationale can apply to the Section 121 gain exclusion rules.

Caution: If gain from the sale of the residence to the controlled entity exceeds the maximum Section 121 exclusion, the excess is taxable as ordinary income (rather than capital gain), since the controlled entity (related-party) purchaser will depreciate the property.

Also, the S-Corp need to be funded to have minimum about of down payment required. The transaction has to be arms length. 

As @Steven Hamilton II  It’s always not the best to hold rentals under crop, but depending on your long term goal, sometime it makes sense to hold it.  If your tax savings is going to be in thousands of dollars, please talk to the professional. 

@Brendan Scully

Depends on how the LLC is taxed. You can't sell a property to a single-member LLC you wholly own that is disregarded for federal income tax purposes. (i.e. you can't sell a property from yourself to yourself -- it won't be respected for federal income tax)

You could sell to a SMLLC that is taxed as an S Corp to utilize the Sec 121 exclusion and get the basis step-up.  Usually this needs a promissory note and actual cash payments to be respected (as opposed to a month liability accrual).

Your tax professional is best equipped to explain the specific ramifications to you and long-term consequences based on your individual facts, circumstances and goals.