Tax Consequences for Transferring Property to a Limited Liability Company

The tax consequences for transferring personal property or real property from an individual to a limited liability company (LLC) differ among the states. This is because an LLC is a business structure created by state law. The state determines the rate at which it will tax the property that an individual transfers to an LLC. A state may tax both the transfer of the property to the LLC and the income of the LLC that the property generates. There may also be a capital gains tax for any realized increases in the fair market value of the property.

An individual usually chooses to transfer personal assets, including real estate, to an LLC to establish the business as a distinct legal entity. For example, they may transfer rental property like a vacation home to the LLC to rent out the property and earn income from it. If the renter has a problem and chooses to sue, the renter will have to sue the LLC rather than the individual. The IRS allows the individual to establish the business as a single-member LLC for income tax purposes. The owner of a set of properties can establish a unique LLC for each property.

For a property owner, transferring property to an LLC requires following certain steps. The owner should start by contacting their lender. Establishing an LLC does not negate the owner’s responsibility to pay the mortgage. After establishing the LLC with the state, the owner should get a tax ID number and open a bank account in the name of the LLC.

The owner should then record the deed for the property being transferred (if real property) as a warranty deed or quitclaim deed. A warranty deed guarantees the title is clear of claims by third parties; a quitclaim deed transfers any interest that the owner may have in the property, which may not be clear ownership to the full parcel, particularly if other parties such as neighbors have authorization to enter the property. An owner may use a quitclaim deed if there is an issue regarding title, such as a transfer of property between related parties or divorcing spouses. Finally the owner should change the rental agreement to reflect the fact that the LLC is now the owner of the property.

After a person transfers property title from themselves to an LLC, the state in which the property is situated may impose a real estate transfer tax. This tax is for the conveyance of the property; it can also be for interests on the property, such as crops or timber. For example, New York imposes a real estate transfer tax on conveyances of real property or interests therein when the purchase price exceeds $500.

Florida imposes a documentary stamp tax. This is an excise tax imposed on certain documents that are executed, delivered or recorded in Florida. A deed is a document that transfers an interest in real property. The individual must pay the tax to the clerk of court in the county in which the property is located when the deed is recorded. When a taxable document such as a deed is not recorded, the individual must pay the tax to the Florida Department of Revenue.

In all Florida counties except Miami-Dade, the tax rate imposed on documents subject to tax is 70 cents on each $100 or portion thereof of the total consideration. For example, the tax on a $400,000 home in Lake County, Florida, would be $2,800. Miami-Dade County has a tax rate of 60 cents on each $100 or portion thereof, of the total consideration. Miami-Dade also has a surtax of 45 cents on each $100 or portion thereof of the total consideration. The surtax is not due on a document that transfers solely a single-family dwelling.

The IRS taxes the income of an LLC, rather than its holdings of personal and/or real property. The IRS classifies a domestic LLC with two members minimum as a partnership for federal income tax purposes. The exception to this rule is if the LLC files IRS Form 8832 for Entity Classification Election and elects to be treated as a corporation.

An LLC with only one member is treated as an entity not regarded as separate from its owner. The exception is if the LLC files IRS Form 8832 and elects to be treated as a corporation. For purposes of employment tax and certain excise taxes, the IRS considers an LLC with one member to be a separate entity.

A state also typically taxes the income of an LLC. State statutes govern the different ways in which a business entity may be classified and taxed. For example, California may regard an LLC as a limited liability partnership; a limited liability limited partnership; a series limited liability company; an LLC being taxed as a corporation; a partnership, if it has more than one owner; a single member limited liability company (SMLLC); or a disregarded entity if it has only one member. California requires that an LLC have the same classification for California and federal tax purposes.

Every LLC doing business in, or organized in California is required to pay an annual tax of $800. An LLC that makes more than $250,000 per year must pay a fee, the amount of which is dependent on how much the LLC earns. For example, an LLC that earns between $250,000 and $499,999 must pay a fee of $900 per year. An LLC is not subject to the annual tax and fee if it did not conduct business in California during the tax year, and its tax year was 15 days or fewer.

An LLC in Pennsylvania may elect to be taxed as a C corporation, as a partnership or as an S corporation. An LLC that elects to be taxed as an S corporation will see its shareholders taxed at the personal income tax rate of 3.08 percent. A shareholder of an S corporation must include their shares of income loss and credit on their personal income tax return. An LLC that elects to be taxed as a C corporation will be taxed at 9.99 percent on its federal taxable income.