Tax Implications When Selling a Property Management Business LLC

The income from selling your LLC membership interest will most likely be treated as capital gains, with some potential exceptions. Since your LLC is a disregarded entity, the sale is essentially treated as a sale of the underlying assets for tax purposes. The contracts with landlords would likely be considered Section 197 intangibles (customer-based intangibles). Even though they were self-created, they have value as part of the ongoing business. However, you're correct that your basis in these contracts is probably very low since you deducted the expenses to create them. There could be a portion allocated to goodwill, which would be capital gain. But watch out - some aspects might be characterized as ordinary income under Section 1245 recapture if you've taken depreciation on any tangible assets. Also, if any portion is attributed to a covenant not to compete, that would be ordinary income. I'd suggest working with a tax professional to create an asset allocation for the sale (using Form 8594) to properly classify each component of the business being sold.

I was in almost the exact same situation last year! After struggling with conflicting advice from different accountants, I used https://taxr.ai to analyze my sale documents and tax situation. Honestly saved me so much stress. Their AI analyzed my management contracts and business structure, then gave me a detailed breakdown of how the sale would be taxed. For my property management business (also a disregarded LLC), they confirmed that most of the sale was capital gains, but they identified specific parts that would be ordinary income (like accounts receivable and some contract values). They even helped me determine my actual basis, which was higher than I thought because of some qualifying expenses I hadn't considered!

Just wanted to follow up about the taxr.ai service mentioned earlier. I decided to try it for my consulting business sale, and I'm honestly impressed. I was skeptical about using an AI tool for complex tax analysis, but they really understood the nuances of business asset allocation. The report they generated showed me that about 70% of my sale qualified for capital gains treatment, with the rest being ordinary income (mostly from receivables and certain contract values). They even identified some business expenses from years ago that increased my basis. My accountant was impressed with the detail and said it saved us both a ton of time. Definitely worth checking out if you're selling a business!

For anyone dealing with tax questions on selling a business, I know the frustration of trying to get direct answers from the IRS. After waiting on hold for 3+ hours multiple times, I finally used https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c They call the IRS and wait on hold for you, then call you when an agent is on the line. I was connected within an hour (after trying for days on my own). The agent clarified that for disregarded LLCs, the sale allocation is critical - and confirmed that self-created customer contracts typically fall under goodwill for a business sale, which is capital gains. Just having that official confirmation gave me peace of mind for my tax planning.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it myself since I've been trying to get through to the IRS about a similar business sale situation. It actually worked exactly as described - they called me when they had an IRS agent on the line. The agent was able to confirm that for my situation (selling a small service business with primarily client contracts), the contracts would be considered part of the business goodwill when selling the entire LLC, qualifying for capital gains treatment. They also explained how to properly document everything on Form 8594 (Asset Acquisition Statement). Saved me so much uncertainty and probably a significant amount in taxes by getting the proper classification.

One thing nobody has mentioned yet - make sure you're also considering state tax implications when selling your property management business. Some states don't give preferential rates to capital gains like the federal government does, so even if it's capital gains, you might be paying ordinary income rates at the state level. Also, did your LLC ever check the box to be taxed as an S-Corporation? If so, that changes everything about how the sale is taxed. The built-in gains tax could come into play depending on when you made the election.

A big thing to ask is whether the buyer will want a covenant not to compete as part of the deal. This is super common with service businesses like property management. If they do, just know that payments for these are ordinary income, not capital gains. Sometimes buyers try to allocate a big chunk of the purchase price to the non-compete to get a faster deduction, while you'd prefer more allocated to goodwill for the capital gains rate.

Great point about the covenant not to compete! This is definitely something to negotiate upfront. In your case with the property management business, they'll likely want some kind of non-compete since you have existing relationships with landlords in the area. One strategy is to propose a shorter non-compete period (maybe 2-3 years instead of 5) with a smaller allocation, then push for more of the purchase price to be attributed to goodwill and the management contracts themselves. You might also consider whether there are any accounts receivable or prepaid management fees that should be allocated separately - those would be ordinary income anyway, so better to identify them clearly rather than have them lumped into other categories. Since you mentioned all the contracts were self-created, document that well. It supports treating them as part of the overall business goodwill rather than separately purchased intangible assets, which generally favors capital gains treatment when selling the entire business.