Selling Property Owned by an LLC: Taxes and Reporting Explained

Selling a property owned by an LLC carries distinct tax implications that differ from selling as an individual. The IRS classification of the LLC, how the sale is reported, and applicable taxes all impact financial outcomes. Understanding these factors helps prevent unexpected liabilities and ensures compliance.

Key considerations include capital gains, depreciation recapture, and proceeds distribution among members. Federal, state, and local tax obligations must also be addressed properly to avoid penalties.

Entity Classification for Tax Purposes

The tax treatment of an LLC selling property depends on its classification for federal tax purposes. The IRS does not recognize LLCs as a distinct tax entity, so they are taxed based on their chosen classification.

A single-member LLC is treated as a disregarded entity by default, meaning income and expenses are reported directly on the owner’s personal tax return using Schedule C, E, or F, depending on the nature of the business.

A multi-member LLC is classified as a partnership unless it elects to be taxed as a corporation. Partnerships file Form 1065, and each member receives a Schedule K-1 detailing their share of income, deductions, and credits. If the LLC elects to be taxed as an S corporation by filing Form 2553, it avoids self-employment taxes on distributions but must pay reasonable salaries to actively involved owners. A C corporation election, made using Form 8832, subjects the LLC to corporate income tax at a flat 21% rate, with dividends taxed again at the individual level.

Determining Capital Gain or Loss

When an LLC sells a property, the difference between the sale price and the adjusted basis determines whether a capital gain or loss occurs. The adjusted basis includes the original purchase price, plus capital improvements, minus deductions such as casualty losses or tax credits. If the sale price exceeds the adjusted basis, the LLC realizes a capital gain; if it falls short, a capital loss is recorded.

The length of ownership affects taxation. Properties held for more than a year qualify for long-term capital gains treatment, taxed at rates of 0%, 15%, or 20% in 2024, depending on taxable income. Short-term gains, from properties held for one year or less, are taxed as ordinary income at rates up to 37%.

Capital losses can offset gains in the same tax year, reducing taxable income. If losses exceed gains, up to $3,000 can be deducted against ordinary income annually, with remaining losses carried forward. Losses on business-use property may qualify for ordinary loss treatment under Section 1231, offering more favorable tax benefits.

Depreciation Recapture

When selling a depreciated property, the IRS taxes part of the gain differently than standard capital gains. Depreciation lowers a property’s taxable basis over time, reducing tax liability while the asset is held. However, when the property is sold for more than its adjusted basis, the IRS recaptures the tax benefits previously claimed by taxing part of the gain at ordinary income rates.

Under the Modified Accelerated Cost Recovery System (MACRS), residential rental properties are depreciated over 27.5 years, while commercial properties use a 39-year schedule. The recaptured amount is taxed as ordinary income, up to a maximum of 25% under Section 1250 of the Internal Revenue Code.

For LLCs taxed as partnerships or S corporations, each member’s share of the depreciation recapture is reported on their Schedule K-1 and taxed on their personal returns. C corporations pay corporate tax rates on recaptured depreciation. A Section 1031 exchange can defer depreciation recapture by reinvesting proceeds into a like-kind property, postponing tax liability until the replacement property is sold.

Proceeds Distribution for Multi-Member Entities

When an LLC with multiple members sells a property, proceeds are distributed based on the ownership structure and the operating agreement. Profits are typically allocated according to each member’s percentage interest, but some agreements include special allocations that distribute gains differently. The IRS scrutinizes such allocations to ensure they meet the substantial economic effect test under Treasury regulations.

Before distributing proceeds, the LLC must settle outstanding liabilities tied to the property, including mortgage balances, unpaid property taxes, and transaction costs such as broker commissions and legal fees. Remaining funds are allocated based on capital account balances, which track each member’s contributions, distributions, and share of profits and losses. If a member’s capital account is negative, they may need to restore the deficit before receiving additional distributions, depending on the LLC’s agreement.

Filing and Reporting Obligations

Once a property sale is completed, the LLC must report the transaction to the IRS. The specific forms and reporting obligations depend on the LLC’s tax classification and how the sale affects each member’s tax liability.

For single-member LLCs treated as disregarded entities, the sale is reported on the owner’s personal tax return, typically using Form 4797 for business property or Schedule D for capital gains and losses. Multi-member LLCs classified as partnerships report the sale on Form 1065, with each member receiving a Schedule K-1 reflecting their share of the gain or loss. If the LLC is taxed as an S corporation, the sale is included on Form 1120-S, and gains are passed through to shareholders via their K-1s. C corporations report the transaction on Form 1120 and pay corporate income tax on any realized gains.

Some states require withholding on real estate sales when the seller is an out-of-state entity or individual. If the LLC has nonresident members, it may have withholding obligations. Under the Foreign Investment in Real Property Tax Act (FIRPTA), a 15% withholding tax applies if foreign individuals or entities hold ownership stakes. Proper documentation, including Form 8288, must be submitted to the IRS to report and remit any required withholding.

State and Local Taxes

Selling property through an LLC often triggers state and local tax liabilities. Each state has its own rules regarding capital gains taxation, transfer taxes, and filing requirements, which can significantly impact net proceeds.

Some states, such as California, tax capital gains at the same rate as ordinary income, meaning LLC members could face rates as high as 13.3% on their share of the gain. Other states, like Florida and Texas, do not impose a state income tax, allowing members to retain more of their earnings. Many jurisdictions also levy real estate transfer taxes, typically calculated as a percentage of the sale price. For example, New York City imposes a transfer tax of up to 2.625% on certain property sales, while Pennsylvania charges a statewide 1% tax, with additional local levies in some municipalities.

Some states require LLCs to pay franchise taxes or annual filing fees, which may be affected by the sale of a major asset. If the LLC is dissolved after the transaction, final state tax returns must be filed, and any outstanding obligations must be settled. Failing to comply with state and local tax requirements can result in penalties, interest, and legal complications. Consulting a tax professional ensures all obligations are met.