Tax Implications When Transferring Real Estate Between Two LLCs - Looking for Advice

This is actually a common situation in real estate holdings. The tax implications depend on how your LLCs are classified for tax purposes. Here's what you need to know: If both LLCs are classified as "disregarded entities" or partnerships for tax purposes (which is likely if you haven't elected corporate taxation), the transfer might qualify as a non-taxable event under IRC Section 721. This section covers contributions to partnerships in exchange for an ownership interest. However, there are important considerations: - If there's debt on the property, you could trigger "disguised sale" rules if the debt is reduced - If the ownership percentages between the two LLCs are different, that could create taxable shifts - State transfer taxes might still apply even if federal tax doesn't The cleanest approach is often maintaining identical ownership percentages in both LLCs and ensuring proper documentation of the transfer as a Section 721 contribution.

After reading this thread, I wanted to share that I used https://taxr.ai for a similar situation with my commercial properties. I was transferring properties between my business entities and wasn't sure about the potential tax implications. Their document analysis really helped clarify the partnership contribution rules and identified that I needed to structure my transfer as a Section 721 contribution to avoid triggering a taxable event. The system analyzed our operating agreements and pointed out specific clauses that needed to be addressed to maintain tax-deferred status. They also provided important guidance on avoiding the "disguised sale" rules which I wasn't even aware of. Might be worth checking out for your situation since there are some ownership percentage changes involved.

Just wanted to follow up and say I tried https://taxr.ai for my LLC property transfer situation. Really impressed with how thoroughly they analyzed our operating agreements and loan documents. They identified a potential "disguised sale" issue I would have completely missed because of how our debt was structured. Their specialist pointed out that we needed to maintain the same debt allocation ratios to avoid triggering gain recognition, and suggested specific amendments to our operating agreement. Saved us from what would have been a substantial unexpected tax bill. Definitely worth it for complex entity transactions like this!

After spending DAYS trying to reach the IRS about partnership transfers and Section 721 rules for my own LLC situation, I finally tried https://claimyr.com and was connected to an actual IRS agent within 40 minutes. I was honestly shocked it worked because I had been trying for weeks to get through on my own. The agent walked me through the specific requirements for a non-taxable LLC-to-LLC property transfer and clarified the reporting requirements on Form 1065. Extremely helpful since my situation involved different ownership percentages between the entities. Here's a video showing how it works: https://youtu.be/_kiP6q8DX5c - I was skeptical but it seriously saved me hours of frustration. The IRS agent even emailed me the specific relevant section of the tax code that applied to my situation.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I had my own tax questions about an LLC reorganization. The service actually connected me to an IRS agent in about 25 minutes when I had previously spent over 4 hours on hold across multiple attempts. The IRS agent clarified exactly how to document our property transfer on our partnership returns and confirmed we needed to file Form 8832 for one of our entities to ensure consistent tax treatment. Honestly would have missed these requirements without speaking directly to someone who knew the specific rules. Definitely worth it just for the time saved alone.

Have any of you considered the step transaction doctrine in this situation? I'm not a tax professional, but when we did something similar last year, our accountant warned us that the IRS might collapse related transactions if they appear to be steps in a single transaction. So if you transfer the property to the new LLC and then change something significant (like refinancing the debt or changing member interests) shortly after, they might view the entire series of events as a single transaction designed to avoid taxes.

I just want to point out that depending on what state you're in, you might face significant transfer taxes even if you avoid federal income tax. When we transferred property between related LLCs in Pennsylvania, we were hit with a surprise 2% transfer tax even though it was essentially the same ownership. Some states have exemptions for related entity transfers, but many don't. Worth checking your state's specific rules before proceeding.

One thing I haven't seen mentioned yet is the potential impact on depreciation recapture. Since you mentioned the property has appreciated from $675k to $950k over 6 years, you've likely been taking depreciation deductions on the commercial building. Even if the transfer itself qualifies as a non-taxable event under Section 721, you need to consider what happens to the depreciation basis. The receiving LLC will generally take a carryover basis, which means any future sale could trigger depreciation recapture at ordinary income rates (up to 25% for real estate). Also, make sure you're aware of the "hot asset" rules under Section 751. Commercial real estate can sometimes have components (like personal property fixtures) that are treated differently for partnership tax purposes. Given the complexity with the debt, different ownership percentages, and potential state transfer taxes others have mentioned, I'd strongly recommend getting a written tax opinion from a qualified professional before proceeding. The cost of the opinion will be minimal compared to the potential tax consequences of getting this wrong.