Posted by Diane (TX) on April 22, 2004 at 19:36:13:
I looked at this some more. In some cases I think this could work. Specifically, it would probably work with a sale to an S corp, or possibly an LLC treated as an S corp. I don’t think it would work if the LLC was treated as partnership, due to partnership law treating gain on any sale to a controlled partnership as ordinary if the property isn’t capital gain property in the hands of the partnership. I also doubt that this would work if the LLC was a disregarded entity.
If this is something you plan to do, verify the structure with a professional.
Is it possible to sell my personal residence, which qualifies for the $500,000 exclusion on gain for tax purposes, to a LLC which I am a member of, and get a new basis on that property at the current sales price? I want to convert it to a rental, but don’t want to lose out on the untaxed gain exclusion available for a residence sale, and also don’t want to have a low basis for depreciation on this as a rental property. Could my wife and I be the main owners of the LLC? Can someone point me to any reliable information on this? Thanks!
Posted by Diane (TX) on April 20, 2004 at 20:16:16:
Capital gain treatment is denied when depreciable property is sold between related parties. An LLC in which the total of your interest plus your wife’s interest is more than 50% is a related party to you. This is per Internal Revenue Code Section 1239(c).
Capital gain treatment is not an issue. The principal residence exclusion of $500,000 every 2 years is the issue. Are you sure that you cannot treat it as a sale to your LLC? I guess you are saying that if your ownership is 50% or less, then it would work?
Thanks for commenting on this. I can’t imagine that others are not interested in this question. It has to be a common occurence that someone would want to convert their residence to a rental, yet take advantage of the $500,000 exclusion, and the limited liability of holding the rental in an LLC, and getting a higher basis, if possible.
I have searched, but if this has been covered before, I have not been able to find it.