Discussion:Putting Residence in LLC

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> Putting Residence in LLC

Davidh0911 (talk|edits) said:

18 July 2007
If a client puts his residence in an LLC in which he and his wife are the only members, does he jeapordize his ability to use the Section 121 principal residence sale tax exemption if he later sells the house? I realize that this is somewhat unusual, but this specific question has been asked and I thought someone here might be able to provide me with a quick answer.

Larry0434 (talk|edits) said:

18 July 2007
If the title of a primary residence is in a LLC name, the 121 exclusion is lost. Not an unusual question at all.

see clarification of SMLLC vs MMLLC below

Jdugancpa (talk|edits) said:

18 July 2007
Does the phrase "disregarded entity" have any meaning?

Kevinh5 (talk|edits) said:

18 July 2007
The additional questions to ask are:

How will the lender see it? Will it trigger a due on sale clause?

How will the homeowner's insurance see it? Will the taxpayers need renters insurance for the contents?

How will the county recording office/transfer tax people see it? will a transfer tax (and re-assessment for property tax) be required?

And: How will the Homestead Exemption be affected? You Florida people can answer this.

Of course, then you've got the estate planning issues to deal with. How will the property transfer at the death of one spouse?

What about the annual LLC filing fees with the Secretary of State? What happens if some are missed?

Davidh0911 (talk|edits) said:

18 July 2007
Ugh - two different answers. I was thinking the same thing as Jdugan - since it would be a disregarded entity, he should still get the Section 121 exclusion. Larry - is there a reg., Revenue Ruling or something that I should look at that says the exclusion is lost?

Kevin - good points - I already checked with our county about the HOmestead Exemption and they said that as long as the couple were the only members and the LLC was done for "estate planning purposes," they could keep their homestead exemption. They don't seem to be really strict about that issue in this area. The client is in the enviable position of not having a mortgage. The only real issue I am concerned about is the Section 121 issue.

Davidh0911 (talk|edits) said:

18 July 2007
Ok - for what it's worth - here is a blurb from an article I just found on the internet. It was actually a reply to a question from a reader:

"You also asked whether you could take advantage of the Capital Gains exclusion under I.R.C. §121 if you transferred your home to an LLC. The IRS has generally treated single member LLCs as disregarded entities, which means that if you transfer your home to an LLC and take back all the membership units, you’ll still be eligible for the capital gains exclusion if the LLC then sells the home.

However, if you transfer one or more membership units to another person (i.e., your son) while the LLC still owns the home, then the LLC will be converted from a disregarded entity to a partnership for tax purposes. In that case, it appears that you will lose the capital gains exclusion if the LLC then sells the home while you still own some of the membership units. In that case, the LLC would have to file a partnership tax return, and the net profits would then be taxed to you and your son in proportion to your membership interests."

This seems logical - but of course logic often has nothing whatsoever to do with the Code! Again, if anyone has a specific source of law (a Reg., Rev.Ruling, Case, etc.) on this issue I would love to have a cite.

JR1 (talk|edits) said:

July 18, 2007
I tended to think that it might be treated as a revocable living trust, which still has 121 treatment, until everyone chimed in with no's. But if that's merely our opinion and nothing definitive, that doesn't help much. Don't you guys use research products?

Larry0434 (talk|edits) said:

18 July 2007
Per 121 (3) Ownership

(i) Trusts. --If a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.

(ii) Certain single owner entities. --If a residence is owned by an eligible entity (within the meaning of §301.7701-3(a) of this chapter) that has a single owner and is disregarded for federal tax purposes as an entity separate from its owner under §301.7701-3 of this chapter, the owner will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the entity will be treated as if made by the owner.

Allowable ownerships are specifically defined.

Larry0434 (talk|edits) said:

18 July 2007
Possibly in a community property state, both may own it.

Davidh0911 (talk|edits) said:

18 July 2007
Ahh - thanks for the reference Larry.

I was thinking that just recently (like within the last two or three months) they changed the rule for disregarded entities to provide that if the ownership interests are owned solely by husband and wife, you could disregard. I think that so many husbands and wives who had an LLC were disregarding the entity that the IRS finally just changed the rule.

But seriously - thanks for the cite. That helps.

P.S. - who needs research tools when you've got this cool board!?!?!

H82WRK (talk|edits) said:

19 August 2008
I've just encountered the same issue, where a married couple set up an LLC (50/50 ownership) and purchased a lot to hold for a few years, taking advantage of current downturn in real estate. If things turn out, they hope to either trade up to a better lot and construct a retirement/second home, or just sell the first lot at a gain (hopefully). Of course, they didn't consult with me until the after the fact. My quick check of the rules seems to indicate that the "disregarded" entity is not available when two members in the LLC. I thought there was an exception when the two members were married and could elect to treat them as one, but the rule seems to say that election is not available where the ownership is in an LLC ...only if held as a "qualified jt venture".

So, a number of questions come to mind...1) Can the h/w LLC be disregarded? 2) If not disregarded, must the LLC file a pship return (would not want to use C corp), 3) Since the LLC acquired the lot and took out the mortgage to do so, can the interest on the loan be treated as investment interest on the pship return and passed through to the members?, 4) If for some reason they ended up just constructing their second home on the first lot, would they be able to treat new construction loan interest as "home mortgage" interest, or does the LLC ownership prevent that?

Larry0434 (talk|edits) said:

20 August 2008
1. Depends on the state. Is it community property or not?

2. LLC does not file C Corp return 3. Depends on intent. Investment intent yes, Plan to build personal residence probably not. 4. Depends on prior answer to number 1.

Riley2 (talk|edits) said:

20 August 2008
Since Hate2work is in GA, I don't believe that Sec. 121 would be allowed in his example.

However, I would think that each spouse could hold a 50% TIC interest in a separate LLC.

Ckeenan1031 (talk|edits) said:

23 February 2009
Sorry to bring back an old topic, but I have an attorney who created an LLC with another person. This LLC then putchased a home and the two members (non-spousal) are using this as thier personal residence. This all happened in 2008, and now I am attempting to prepare the tax return (Form 1065). They are each paying 'rent' to the LLC and the LLC is paying the mortgage, taxes, insurance, etc...A couple of questions come to mind...
  1. Has the client eliminated their ability to take the Section 121 exclusion? (I am thinking that they have)
  2. I am also guessing that they will not be able to depreciate their personal residence or to deduct expenses that would not be deductible to someone who did not form an LLC. This seems like a 'sham' trasaction, as the LLC has no real 'business purpose'

I am interested in others thoughts..

Futenma (talk|edits) said:

23 February 2009
I think Prop Reg 1.280A-1(e)(5)(iii)(B) addresses your situation.

Ckeenan1031 (talk|edits) said:

23 February 2009
Thank you for putting my thoughts into a cite.

Thanks, Chris

To join in on this discussion, you must first log in.
Personal tools