Do you pay capital gains tax twice on LLC property sale with owners withdrawal? Tax implications explained
Just sold a rental property that was owned through our LLC. My business partner and I each own 50% and initially invested $15k each. The property had an adjusted cost basis of $105k and we managed to sell it for $158k. So there's about $53k in capital gains that we're splitting between us, and we're each taking a withdrawal of $26.5k from the LLC. I'm confused about the tax situation here. I understand we'll pay capital gains tax on the profit from the property sale, but I'm not sure if we also pay taxes on the withdrawal amounts separately? If we each put in $15k originally and now take out $26.5k, do we pay taxes on that entire withdrawal or just the gain portion? And if we do need to pay taxes on the withdrawal too, where exactly does that get reported on our tax forms? Trying to get this right before tax season next year.
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Natasha Petrova
You don't pay capital gains tax twice on the same money. The capital gain from the property sale flows through to the LLC owners based on their ownership percentage. Since you each own 50%, you'll each report $26.5k of capital gain on your personal tax returns. Your initial $15k investment represents your basis in the LLC. When you withdraw $26.5k, only the amount that exceeds your basis ($26.5k - $15k = $11.5k) represents a taxable gain, but this is the SAME gain that's already being reported from the property sale, not an additional tax. Report this on Schedule D and Form 8949 of your personal tax return. The LLC will provide you with a Schedule K-1 (Form 1065) showing your share of the gain. You don't pay additional tax just for withdrawing your money from the LLC - the tax is on the appreciation of the property, not the movement of funds.
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Javier Hernandez
•Thanks for the explanation, but I'm still a bit confused. So the LLC itself doesn't pay any tax on the gain? And when I get the money out of the LLC, there's no additional tax event happening? Doesn't the IRS view the withdrawal as a distribution that gets taxed separately?
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Natasha Petrova
•The LLC itself doesn't pay taxes if it's a pass-through entity (which most LLCs are). All profits and losses "pass through" to the owners' personal tax returns. When you withdraw money from the LLC, it's considered a distribution. However, distributions aren't taxed separately if they've already been taxed as pass-through income. The capital gain from selling the property passes through to you, you pay tax on it once, and that's it. The IRS doesn't tax the same money twice. Distributions only become taxable if they exceed your basis in the LLC, but in that case, it's still the same underlying gain being taxed, just through a different mechanism.
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Emma Davis
After struggling with almost the exact same situation last year, I found this amazing tool that saved me countless hours and probably thousands in potential mistakes. Check out https://taxr.ai - they have a specific section for real estate investors and LLC distributions. I uploaded my LLC docs and property sale info, and it gave me a detailed breakdown of how the capital gains would be taxed and exactly where to report everything on my return. It even highlighted that I could exclude some of the gain due to depreciation recapture rules I had no idea about!
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LunarLegend
•Does it handle multi-member LLCs specifically? My tax guy always gets confused with our partnership split and how distributions should be reported compared to the actual gains.
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Malik Jackson
•I'm skeptical about these online tools. How does it compare to something like TurboTax Business? I've used that before but it always seems to miss nuances with pass-through entities.
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Emma Davis
•Yes, it absolutely handles multi-member LLCs! I was in a 60/40 split with my business partner, and it correctly allocated everything including our unequal contributions. The tool generates specific guidance for each member based on their ownership percentage. It's actually much more specialized than TurboTax for these situations. TurboTax asks generic questions, but taxr.ai specifically analyzes your LLC operating agreement, previous distributions, and property documents to give context-aware advice. It caught that my partner and I had different basis amounts in our LLC due to some earlier transactions, which would have been a nightmare to figure out manually.
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Malik Jackson
I just tried taxr.ai after seeing it recommended here and wow, I'm impressed! I was having the exact same confusion about my LLC property sale from last year. The tool analyzed my K-1 and immediately identified that I was about to double-count some income on my Schedule E. Would have ended up paying an extra $3,800 in taxes! It also generated a detailed explanation of basis calculations that I can give to my accountant to make sure everything gets reported correctly. Definitely worth checking out if you're dealing with LLC property sales.
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Isabella Oliveira
If you're still confused after getting tax advice, you might need to speak directly with the IRS. I was in a similar situation with an LLC property sale last year and kept getting conflicting information from different accountants. After trying for WEEKS to get through to the IRS (always "higher than normal call volume"), I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent in about 20 minutes who confirmed exactly how to handle the basis calculations for my LLC withdrawal without double-taxation.
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Ravi Patel
•How does this actually work? Does Claimyr just keep calling the IRS for you until they get through? I've spent hours on hold before giving up.
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Freya Andersen
•Yeah right. Nobody gets through to the IRS in 20 minutes. I've literally spent 3+ hours on hold multiple times this year trying to sort out a much simpler issue than LLC capital gains. I find it hard to believe any service could make that process faster.
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Isabella Oliveira
•It's more sophisticated than just auto-dialing. They use some algorithm that predicts the best times to call based on IRS staffing patterns and call volumes. When a line opens up, they call you and connect you directly to the IRS agent - you don't waste any time on hold. The IRS agent I spoke with was actually incredibly helpful once I got through. She explained that for an LLC taxed as a partnership, the capital gain flows through on the K-1, and withdrawals only become taxable when they exceed your basis in the LLC - which includes your initial contribution plus your share of undistributed profits from previous years.
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Freya Andersen
Well, I have to eat my words. After my skeptical comment, I decided to try Claimyr anyway because I was desperate to talk to someone at the IRS about my LLC sale from last quarter. Got connected in 15 minutes! The agent confirmed that we don't pay tax twice on the same money - the property sale creates a capital gain that flows through to owners, and distributions are only taxable if they exceed your basis in the LLC. In my case, I was actually calculating my basis incorrectly and nearly overpaid by a significant amount. Saved me from a costly mistake and hours of frustration.
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Omar Zaki
Don't forget about state taxes too! Depending on what state you're in, the rules can be completely different from federal. In California, for example, an LLC pays an annual tax plus an LLC fee based on total income, even though it's a pass-through entity federally. And some states have different treatment of capital gains vs ordinary income.
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CosmicCrusader
•Does anyone know how New York handles this? I'm in a similar situation but in NY state. My accountant mentioned something about additional filing requirements but wasn't very clear.
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Omar Zaki
•New York generally follows federal treatment for LLCs taxed as partnerships, so the pass-through concept applies. However, NY has its own form IT-204 (Partnership Return) that needs to be filed, and NY has its own version of Schedule K-1 called the IT-204-IP. The capital gain from the property will flow through to the members, but one important difference is that NY doesn't have a preferential tax rate for capital gains like the federal government does - it's all taxed at your ordinary income rate. Also, if the property was located in NY but any of the members live out of state, there are nonresident filing requirements to consider.
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Chloe Robinson
Wait, I just realized something... did you account for depreciation recapture? If you've been taking depreciation deductions on the rental property (which you should have been), then part of your gain might be subject to depreciation recapture at a 25% rate rather than the lower capital gains rates. This gets reported on Form 4797.
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Diego Flores
•This is an excellent point! I almost got audited because I missed this on a property sale last year. If you've owned the property for several years and have been claiming depreciation (usually 27.5 years for residential rental property), you'll have to recapture that depreciation when you sell. The recaptured amount gets taxed at 25% instead of the usual 15% long-term capital gains rate.
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James Maki
Great question! I went through something very similar with my LLC property sale last year. Here's what I learned: you're NOT paying capital gains tax twice. The $53k gain from the property sale flows through to you and your partner based on your ownership percentages (50/50 in your case). Each of you will report $26.5k of capital gain on your personal tax returns via Schedule D and Form 8949. The key thing to understand is that your withdrawal of $26.5k isn't a separate taxable event - it's simply you taking out your share of the proceeds. Your original $15k investment becomes part of your "basis" in the LLC. When you withdraw $26.5k, you're essentially getting back your $15k investment plus your $11.5k share of the gain, but you only pay tax on the gain portion once. The LLC will issue you each a Schedule K-1 (Form 1065) showing your share of the capital gain. Make sure to also consider if you've been taking depreciation deductions on the property - if so, you'll need to account for depreciation recapture on Form 4797, which gets taxed at 25% rather than the typical capital gains rates.
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Zoe Papadakis
•This is really helpful! I'm new to LLC property investing and was worried I might be missing something important. Quick follow-up question - when you mention the Schedule K-1 from Form 1065, does the LLC automatically file that partnership return, or is that something we need to handle ourselves? And how does the timing work - do we need to wait for the K-1 before filing our personal returns?
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