Transfer Property to LLC and Tax on Selling Profit

5 Replies

I have 2 scenarios that I would like to ask on the tax. At this point, I don't know whether I should do it.

1. I want to transfer a property I just purchased to my LLC A on title using the Warranty Deed. I purchased it for an amount of $x. If I sell it 5 years later for $y, would my company be taxed on the capital gain ($y - $x) or would my company be taxed on the full selling price $y?

2. I want to transfer another property I purchased to my Incorporation B on title using the Warranty Deed.I purchased it for an amount of $x. Then I will give 50% share of my company to my brother. If we sell it 5 years later for $y, would our company be taxed on the capital gain ($y - $x) or would our company be taxed on the full selling price $y?

@Jay Truong Generally you will be taxed on capital gains, which is your selling price less your adjusted basis. In the first scenario if you are the only member of the LLC your company will not be taxed. The LLC will be treated as a disregarded entity and you will report the income on your personal return. In the second scenario, it is rarely advisable to put appreciable property into a corporation. If you transfer the property to the Corp and give 50% to your brother you will not be in control of the Corp and may trigger gain on the transfer of property on your personal return. You should consult your CPA for a more detailed explanation.

@Jay Truong

Be careful with #2.  There are estate/gift tax ramifications as well as potential elections that need to be considered if the company is a partnership.  If a corporation, you should talk to your tax pro about whether it makes sense for you to transfer rental real estate into a corporate tax entity.  Usually it doesn't...

Thanks @Dominick Austria and @Eamonn McElroy .

So I will try to avoid doing scenario 2 (transferring share of incorporation).

What if I add his name to the title (which means the company and his name will be on the title, and it is considered a gift for him), would he be taxed on the 50% full selling price $y or would he be taxed on the capital gains only?

@Jay Truong

A person who receives an asset as a gift generally "steps into the shoes" of the one who gave the gift (i.e. the tax basis of the asset transfers).

When a capital asset is sold, you are taxed on the net gain, that is: gross proceeds less tax basis.

A person's goals are just as important as tax ramifications when considering a certain path.  I'd advise both you and your brother to talk to professionals before you gift 50% of the interest in a property.

Originally posted by @Eamonn McElroy :

@Jay Truong

A person who receives an asset as a gift generally "steps into the shoes" of the one who gave the gift (i.e. the tax basis of the asset transfers).

When a capital asset is sold, you are taxed on the net gain, that is: gross proceeds less tax basis.

A person's goals are just as important as tax ramifications when considering a certain path.  I'd advise both you and your brother to talk to professionals before you gift 50% of the interest in a property.

 Thanks. I got the idea now and I will talk to my CPA.

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