Can I sell a rental property to my LLC at a loss to offset Capital Gains

Question

So here's the scenario

• I own a rental property that's fully paid off and in my name
• I own an LLC that's specifically for my rental properties. Currently it's just being used to collect rent and doesn't have any properties in its name. This is changing very soon though.
• I have capital gains from other personal investments such as stocks and crypto currency

Question

Can I sell the rental property that I own, for less than I paid for it, to the LLC that I control, in order to show a loss in order to offset the capital gains from other investments?

Answer 1

The IRS looks at these types of transaction with skepticism. Since it isn't being sold at fair market value, they are concerned that any losses are fake.

Of course selling the property for less than you paid for it might not work the way you expect. In those years that you rented the property to tenants you were taking depreciation of the structure. During those years the value of the land may have increased. Don't forget that the IRS recaptures the depreciation. So even if you did fix the price to minimize taxes, you would have to figure out the number to make this work. That much calculation would show that it wasn't a fair market value.

Now if you want to move it under the LLC your tax advisor and attorney may know how to make the transfer, without making it a fake price.

Answer 2

The main purpose of an LLC is to provide liability shield, and complex distribution of ownership vs management rights, without the tax complexities and "double taxation" of a corporation.

The IRS won't even see it

When you form an LLC, it assumes pass-through tax treatment by default. It's possible to elect corporate tax treatment, in which case the LLC files its very own Form 1120 every year, but that's pretty unusual, for obvious reasons.

"Pass-through" means LLC assets, gains, debts and losses are simply treated as those of the individual Members and pass through to their individual 1040 tax forms.

A "Single Member LLC" or "SMLLC" is a little more special. With only one Member, and pass-thru tax treatment, there is only one 1040 tax form involved. At this point, the IRS calls the LLC a Disregarded Entity.

With an SMLLC, thus, IRS simply treats all LLC assets, income, debt and expenses as your personal items. Selling your real estate to the LLC would be a non-transaction in the IRS's eyes. They wouldn't care what value the SMLLC carries on its books, since it's the same books. When the LLC finally sells the property, its cost basis would be what you originally paid for it (since again you and the LLC are one and the same).

But you will have real costs.

You or the LLC may be able to deduct costs-of-sale, i.e. closing costs. There are very real costs in that real estate transaction. There may also be sales taxes amongst the various closing costs.

Also, this won't help you with tax assessments, as the assessor will simply ignore a below-market value and use market values. Worse, if your state has a Proposition 13 style law (which freezes tax assessment to value at the time of home purchase, so rising home values don't cause rising taxes and drive seniors etc. out of their lifetime homes)... the sale to the LLC will trigger a new tax assessment at market values.