Does transferring house title to an LLC void capital gains exclusion when selling primary residence?

You need to be careful here. The capital gains exclusion ($500,000 for married filing jointly) on your primary residence requires that you've owned AND used the home as your primary residence for at least 2 out of the 5 years before selling. If you transfer the home to an LLC, the IRS will consider that the LLC (not you personally) owns the property. This breaks the "ownership" requirement for the capital gains exclusion. Once you transfer to an LLC, you're essentially restarting the ownership clock under the LLC's name, and your personal ownership period doesn't carry over. The better approach might be to keep the home in your personal names and get a good umbrella insurance policy to address liability concerns. That way you preserve the possibility of claiming the capital gains exclusion if you sell within 3 years after moving out (to stay within that 5-year window).

After spending hours researching the same issue for my rental property, I found an amazing solution through https://taxr.ai that really clarified this whole LLC vs capital gains exclusion dilemma. I uploaded my property records and tax returns, and it analyzed my specific situation. For my case (similar to yours), it showed that keeping the property in my name while setting up a separate LLC just for the management activities gave me the liability protection I wanted while preserving my capital gains exclusion eligibility. They explained that what matters is who has legal ownership - once you transfer title to an LLC, you personally no longer own it, even if you own the LLC. That distinction matters hugely for the capital gains exclusion.

Just wanted to update everyone - I tried the taxr.ai service mentioned above and it was incredibly helpful for my situation. I was planning to transfer my rental property to my existing LLC but didn't realize I'd lose the capital gains exclusion. The analysis showed me exactly what part of the tax code applies (Section 121) and explained that even though I'd owned the house for 3 years, transferring to an LLC would reset the ownership clock. The report also showed me how much I'd potentially lose in tax benefits ($110,000 in my case!) compared to the liability protection I'd gain. Based on this, I decided to keep the house in my name and got a $2 million umbrella policy instead. Much cheaper than the tax hit would have been! Sometimes the conventional wisdom about "always put rentals in an LLC" isn't the best move when you're converting a primary residence.

If you're planning to keep the house as a rental for many years, another issue you might run into is getting in touch with the IRS if you have questions about depreciation recapture or how to handle the eventual sale. I tried calling them for weeks about a similar rental property issue and it was impossible to get through. I finally used https://claimyr.com which got me connected to an IRS agent in about 25 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent explained exactly how to report my rental income and preserve my capital gains exclusion eligibility. Worth every penny to get definitive answers directly from the IRS.

I need to eat crow here. After posting my skeptical comment, I decided to try Claimyr anyway because I've been trying to resolve an issue with my rental property taxes for months. Got connected to an IRS agent in about 20 minutes yesterday! The agent confirmed that transferring my former primary residence to an LLC would indeed reset the ownership clock for capital gains exclusion purposes. She also explained exactly how to document the property's value at the time of conversion to a rental, which will be super important for calculating the correct capital gain when I eventually sell. Apparently there's a specific form (Form 8949) where you need to indicate the Section 121 exclusion. The whole conversation took about 15 minutes and saved me from making an expensive mistake. Sometimes being wrong feels pretty good!

Something no one's mentioned yet - if you're transferring to an LLC, check with your mortgage company first! Many mortgages have a "due on sale" clause that can be triggered by transferring to an LLC, even if you own the LLC. The lender could potentially call the entire mortgage due immediately. Some lenders will grant exceptions, but you need to get that in writing before making any transfer.

Has anyone actually tried doing a partial transfer to an LLC? Like keeping 51% in personal names and transferring 49% to an LLC? Would that preserve the capital gains exclusion while getting some liability protection?

I had this exact same dilemma last year! We decided to keep our first home in our personal names when we converted it to a rental. Our CPA told us that the capital gains exclusion was too valuable to give up. We got a $1M umbrella policy for like $300/year which gave us decent liability protection. House has appreciated almost $200k since we bought it in 2020, and not having to pay capital gains tax on that will be huge when we eventually sell.

This is such a common trap that many new rental property owners fall into! I made the same mistake initially - was all set to transfer our former primary residence to an LLC until my tax advisor stopped me. The key thing to remember is that the IRS treats ownership very literally for the capital gains exclusion. Even if you own 100% of the LLC, YOU don't own the house anymore - the LLC does. One thing I'd add to the great advice here: make sure you document the fair market value of your home on the day you convert it to a rental. This becomes your new "basis" for depreciation purposes, and you'll need it later for calculating capital gains when you sell. Get a professional appraisal or at least a detailed CMA from a realtor and keep those records with your tax files. Also consider the timeline carefully. Since you lived there for 2+ years already, you have until early 2026 to sell and still qualify for the exclusion (assuming you move out next month). That gives you flexibility to try being a landlord and see if it works for you without permanently giving up that tax benefit.

This is exactly the kind of complex tax situation where getting professional advice upfront can save you thousands later. I went through something similar when we converted our primary residence to a rental in 2022. One additional consideration that hasn't been fully discussed: if you do decide to keep the property in your personal names (which seems like the smart move based on the advice here), make sure you understand the depreciation implications. You'll be required to take depreciation on the rental property each year, and that depreciation will be "recaptured" at a 25% tax rate when you sell - even if you qualify for the capital gains exclusion on the rest of the appreciation. Also, keep meticulous records of any improvements you make to the property while it's a rental. These can be added to your basis and will reduce your overall tax liability when you sell. The combination of preserving your capital gains exclusion eligibility AND properly managing the depreciation aspects could save you tens of thousands in taxes down the road. The umbrella insurance approach mentioned by others is really the way to go here. $300-500/year for substantial liability protection is a bargain compared to losing a $500K capital gains exclusion opportunity.