Q: If a commercial property is moved over from private ownership to a limited liability company (LLC), does the property retain the basis that it had in the hands of the private owner or does it get a stepped-up basis when transferred? If it gets a stepped up basis, is there capital gain to the owner?
A: There is no simple answer to your question. The answer will very much depend on how the transfer was structured and the parties involved.
As a starting point, if you are the individual and you transfer the commercial property to an LLC, that transfer may be a taxable event. If you have either ordinary income or capital gains as a result of the “sale,” you will have to pay taxes on the transfer.
You may need an appraisal of the property to determine what your gain was and depending on how long you held the property, you will owe tax on the sale. The tax may be ordinary income, if you held the property for less than a year, or it may be taxed as a capital gain, if you held the property for more than a year.
If the transfer was considered a taxable event (i.e., like a sale), the new owner would take the property at its value at the time of the transfer. In other words, if the property has gone up in value, the LLC would take the property at its stepped-up value.
Your question is interesting in that I can’t tell if you want to pay the taxes and get a stepped-up basis or you are trying to transfer the property without having any tax consequences.
If you are trying to transfer the property and not trigger any tax issues, the transfer of the property from you as an individual to the LLC must be “invisible” for Federal income tax purposes. In other words, for Federal income tax purposes if you hold the property as an individual or as an LLC it must have the same effect on you.
One of the ways to avoid a taxable event is to transfer the property to an LLC of which you are the only member. If you set up the LLC as a sole member LLC and your election is to treat it under your tax payer identification, your transfer should be without tax consequences.
In any transfer of property, you need to consult with your tax advisor. You may have specific issues that may prevent you from transferring the property to the LLC. Each individual transaction has its own particular and interesting issues that need to be addressed so you need to make sure you run what ever you plan to do with a competent tax professional to make sure you accomplish your goal.
Published: Aug 12, 2005