Gift tax or Capital Gains tax when transferring inherited property to LLC

Thanks for the detailed explanation. Quick question though - wouldn't they get a stepped-up basis since it was inherited from their grandmother? Or does that only apply if the grandmother passed away and it was inherited rather than gifted while she was alive?

You've highlighted an important distinction. With a gift during the grandmother's lifetime, the recipient generally takes the donor's basis (called a "carryover basis"). However, if the property was inherited after death, the recipient would receive a "stepped-up basis" to the fair market value at the time of death. Based on the original post mentioning it was "gifted," I assumed this was a lifetime gift rather than an inheritance. If it was actually inherited after the grandmother's passing, then the basis would indeed be stepped up to the property's value at the date of death, which would significantly reduce potential capital gains taxes upon sale.

Did they provide any insights about the gift tax annual exclusion? I'm wondering if that's relevant in a situation like this where you're essentially making a partial gift to the other LLC member.

Sounds interesting but I'm skeptical about how they handle complex situations. Did they actually give you specific advice on structuring the transaction or just general information? I've used tax software before that claimed to handle business situations but ended up being pretty generic.

They actually did address the gift tax annual exclusion and how it might apply when transferring property to a partially-owned LLC. They explained that under current rules, I could potentially use my annual gift tax exclusion (currently $17,000 per recipient per year) to cover part of the transfer to the other member, and that the lifetime estate and gift tax exemption could cover larger amounts without triggering immediate tax. Regarding your question about specific vs. general advice, they definitely provided transaction-specific guidance. They reviewed my LLC's operating agreement and ownership structure and suggested several alternative approaches with the specific tax consequences of each. It wasn't just general information - they helped me structure the actual transaction documents to optimize my particular situation. The advice was customized to my specific property value, basis, and LLC ownership percentages.

How does this service actually work? I'm confused about how a third party can get you through to the IRS faster when their phone lines are completely jammed. Seems too good to be true.

Yeah right. I've been dealing with the IRS for years and there's no magic way to skip their phone queue. Even if you did get through, most agents aren't trained on specialized gift tax and LLC issues. I seriously doubt they gave you detailed advice on property transfers - that's not their job.

It uses a technology that maintains your place in the IRS phone queue without you having to stay on the line. Basically, it waits on hold for you and then calls you when an actual IRS representative picks up. I was skeptical too until I tried it - I got a call back in about 45 minutes after weeks of failed attempts. Regarding your skepticism about IRS agents providing detailed advice - I spoke with someone in their Business and Specialty Tax division who absolutely was knowledgeable about property transfers to business entities. They directed me to specific IRS publications related to my situation and explained how to properly document the transaction. You're right that not every IRS agent would know this information, but they transferred me to someone who specialized in business entity issues after I explained my situation.

I haven't looked into 1031 exchanges yet. Would that still work if I'm transferring the property from myself personally to my LLC first? Or would the exchange need to happen directly from the current ownership to a new investment property?

For a 1031 exchange to work properly, the entity that sells the property must be the same entity that purchases the replacement property. So if you transfer the property to your LLC first, then your LLC would need to be the one doing the 1031 exchange. If you're planning to sell soon and reinvest through your LLC, you might want to consider transferring the property to your LLC now (understanding the potential partial gift tax implications to your LLC partner) and then having the LLC do the 1031 exchange. Alternatively, you could do the 1031 exchange yourself personally and then transfer the replacement property to the LLC, though this creates another transfer event with potential tax implications.

This is such an important point that often gets overlooked. In Pennsylvania, for example, there's a 2% transfer tax when conveying real estate, though there are some exemptions for transfers between certain related parties. California has completely different rules. The state-level implications can sometimes be as significant as the federal tax considerations.

This is really helpful advice, especially about the promissory note approach. I hadn't considered structuring it as a sale to the LLC rather than a straight contribution. A couple follow-up questions if you don't mind - when you did the promissory note method, did you have to charge market interest rates? And how did that affect the LLC's basis in the property compared to if you had just contributed it directly? Also curious about the professional appraisal - did you get it done before or after the transfer? I'm wondering about timing since property values can fluctuate and the IRS might question if there's too much of a gap between appraisal date and transfer date.

Yes, you absolutely need to charge market interest rates on the promissory note - the IRS publishes Applicable Federal Rates (AFR) monthly that you need to meet or exceed. When I did mine, I used the mid-term AFR since my note was for 5 years. If you charge below-market rates, the IRS can impute income and treat the difference as a gift. Regarding basis, when the LLC purchases the property with a promissory note, the LLC's basis becomes the purchase price (fair market value), which is generally better than the carryover basis you'd get with a straight contribution. This higher basis could reduce capital gains when the LLC eventually sells the property. For the appraisal timing, I got it done about 30 days before the transfer. My attorney recommended staying within 90 days to avoid valuation challenges. The key is documenting that you used the appraisal value contemporaneously with the transaction - don't get an appraisal and then sit on it for months before doing the transfer. One more thing - make sure the promissory note terms are realistic and that the LLC actually has the cash flow to make the payments. The IRS will scrutinize whether it's a legitimate business transaction or just a way to avoid gift taxes.