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Rental property and LLC

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shawnusa

Member
What is the name of your state (only U.S. law)? Mass

I have a house that currently rent it out. If I do not sell it within 3 years, I need to pay tax on the gain.

Someone told me that I could form an LLC, and then switch the house into the LLC. That way I can avoid to pay the gain on tax when sell it later on. Does anyone know if that is true?

Thanks!
 
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LdiJ

LdiJ

Senior Member
shawnusa said:
What is the name of your state (only U.S. law)? Ma

I have a house that currently rent it out. If I do not sell it within 3 years, I need to pay tax on the gain.

Someone told me that I could form an LLC, and then switch the house into the LLC. That way I can avoid to pay the gain on tax when sell it later on. Does anyone know if that is true?

Thanks.What is the name of your state (only U.S. law)?
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No, that is not true. The LLC would merely be liable for tax on the gain instead, and since it would be your LLC, you would still be liable. Also, since you are renting it out, you would be liable for the prorated portion of the gain that applies to the period of the rental, anyway.
 
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Mass_Shyster

Senior Member
LdiJ said:
The LLC would merely be liable for tax on the gain instead
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What basis would be used for the tax calculation for the LLC?

Assuming OP purchased home in 1980 for $100,000, and the current fair market value is $350,000. Also assuming home was OP's primary residence for past two years. If OP sells house for $350,000 within next three years, OP does not pay capital gains on $250,000 gain. If OP sells house for $350,000 in four years, OP pays capital gains on $250,000 (not primary residence for two of past five years)

What if OP sells house to LLC NOW for $350,000? Is OP liable for $250,000 gain? Is LLC's basis now $350,000? If LLC sells house four years from now for $350,000, LLC has no gain. Would the IRS see this as a thinly veiled attempt to evade capital gains tax on $250,000 or is this a legal way to avoid capital gains tax on $250,000.

I don't know these answers, but I would guess this is OP's theory.
 
LdiJ

LdiJ

Senior Member
Stevef said:
What basis would be used for the tax calculation for the LLC?

Assuming OP purchased home in 1980 for $100,000, and the current fair market value is $350,000. Also assuming home was OP's primary residence for past two years. If OP sells house for $350,000 within next three years, OP does not pay capital gains on $250,000 gain. If OP sells house for $350,000 in four years, OP pays capital gains on $250,000 (not primary residence for two of past five years)

What if OP sells house to LLC NOW for $350,000? Is OP liable for $250,000 gain? Is LLC's basis now $350,000? If LLC sells house four years from now for $350,000, LLC has no gain. Would the IRS see this as a thinly veiled attempt to evade capital gains tax on $250,000 or is this a legal way to avoid capital gains tax on $250,000.

I don't know these answers, but I would guess this is OP's theory.
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If we are talking about a single member LLC, or even an LLC husband and wife as members its going to be a disregarded entity for tax purposes, therefore the above would be irrelevant.

Even if another type of entity was involved with multiple members/shareholders if money doesn't change hands, or there isn't equal investment by all the parties, you have problems and complications.

Bottom line, what the OP wants to do will not work.
 
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tranquility

Senior Member
It won't work for two reasons. One, the OP would be a related entity and the rules are different there. The second, um, where's the LLC getting the money?

(I started to go through the analysis of if a note was used to pay, but the end result is the same if things go well and changes the character to ordinary income if things don't go well.)
 
FlyingRon

FlyingRon

Senior Member
shawnusa said:
That is what I am trying to find if there is a legal way to avoid capital gains tax.

Thanks!!!
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There really exists only two things you can do. One you can defer the gain by rolling it into a like-kind investment (1033 exchange). There are specific rules for doing this so you'd be advised to get further advice before doing so.

The only other one would be to convert it back to your principal residence for a couple of years and make use of the current rules for deferring the gain on that sale.
 
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tranquility

Senior Member
The only other one would be to convert it back to your principal residence for a couple of years and make use of the current rules for deferring the gain on that sale.
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This is worded precisely correct. The "current rules" are problematical in this situation. Depending on the exact facts, there may only be a proportional amount of the gain which 121 applies because of the residence, business, residence possibility.
 
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Mass_Shyster

Senior Member
FlyingRon said:
There really exists only two things you can do. One you can defer the gain by rolling it into a like-kind investment (1033 exchange). There are specific rules for doing this so you'd be advised to get further advice before doing so.
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I remembered it as being a 1031 exchange. I've been wrong before though (today even)

The only other one would be to convert it back to your principal residence for a couple of years and make use of the current rules for deferring the gain on that sale.
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My understanding is that OP lived in the home until very recently, and just started renting. My guess is he still has the required two of five past years.
 
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davew128

Senior Member
Stevef said:
My understanding is that OP lived in the home until very recently, and just started renting. My guess is he still has the required two of five past years.
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Which still won't exempt the entire gain since it is now a rental property.
 
LdiJ

LdiJ

Senior Member
davew128 said:
Which still won't exempt the entire gain since it is now a rental property.
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and you cannot do one of those exchanges on your personal residence either, it has to be investment property. He is trying to find a way to "sell" the house now, even though he doesn't have an outside buyer.
 
FlyingRon

FlyingRon

Senior Member
Stevef said:
I remembered it as being a 1031 exchange. I've been wrong before though (today even)



My understanding is that OP lived in the home until very recently, and just started renting. My guess is he still has the required two of five past years.
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Ah, your right...I'm typing faster than I can think. It is indeed 1031. 1033 covers involuntary conversions.
 
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shawnusa

Member
Thanks all for the help. It looks like there is no way to avoid capital gains tax if sold many years later. Form a LLC does not working either.
 
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tranquility

Senior Member
Correct he can not deduct the part that he took (or should have taken) as depreciation.
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The recapture of depreciation has always been true. (At least since 1986.) The proportional exclusion for property which has some business/non-residential use has to do with the changes in Section 121 in 2009.
 
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