Capital Gains on Selling a house to my LLC

[justinl]

[Repost from Real Estate Law] OREGON - Can I sell a house that I lived in for two of the past five years, to an LLC that I am a member of (not sole member, though) and get the Federal Capital Gains exemption on home sale (profit is less than $250K)?

 

[shortbus]

How much of the LLC do you own? What is the purpose of the transaction? (ie any business purpose, or is it manufactured to avoid tax)

 

[justinl]

I own 1/3 of LLC (with brother and father). The LLC will be a holding company for rental properties (my house being the second) for investment purposes. A partial reason for the sale to the LLC is to take advantage of tax exemption, but also to limit my liability should I get sued for one of the rentals.

 

[shortbus]

Ask a real estate atty. It sounds legit, though the govt might consider you to be selling only 2/3 of the house (because you end up with 1/3 of it at the end of the transaction) and limit your cap gain exemption accordingly.

 

[abezon]

The problem I see is that this is a related party transaction. By selling the home to the LLC, you are getting a free step-up in basis, which will allow you to claim a larger depreciation deduction. If you were simply to start renting the home, you'd have no step up in basis & lower depreciation.

I suspect that the IRS regulations will require that you maintain your basis for your 1/3 interest, while your brother & dad get a step-up in basis to 1/3 of FMV. The answer may depend on whether your LLC is taxed as a partnership or corporation. I strongly suggest you consult an enrolled agent or tax attorney & get a formal opinion. Be sure the person you hire has malpractice insurance in case they're wrong.

 

[LdiJ]

The problem I see is that this is a related party transaction. By selling the home to the LLC, you are getting a free step-up in basis, which will allow you to claim a larger depreciation deduction. If you were simply to start renting the home, you'd have no step up in basis & lower depreciation.

I suspect that the IRS regulations will require that you maintain your basis for your 1/3 interest, while your brother & dad get a step-up in basis to 1/3 of FMV. The answer may depend on whether your LLC is taxed as a partnership or corporation. I strongly suggest you consult an enrolled agent or tax attorney & get a formal opinion. Be sure the person you hire has malpractice insurance in case they're wrong.

I just recently did some serious research on this particular issue, and I definitely agree with you if the LLC is being taxed as an S corp. However, I did not get into partnership issues on that case study....so I don't know the answer there. If its a partnership he might be better off contributing the house to the partnership as contributed capital.