What Taxes Do You Pay When You Transfer a Property to an LLC?

What Taxes Do You Pay When You Transfer a Property to an LLC?

If you're transferring a property to an LLC, you may face state and local transfer taxes, potential capital gains taxes if the property has appreciated, and a property tax reassessment if local rules apply. If the property has a mortgage, you might trigger a due-on-sale clause requiring full repayment. And transferring property without receiving its full value can lead to gift tax implications. Here's an overview of the different tax liabilities:

1. Transfer Taxes: Many states and local jurisdictions impose transfer taxes when property ownership changes. The applicability and rate of these taxes vary by location. For instance, in New York, the transfer tax is $2 for every $500 of property value up to $1 million, with an additional 1% mansion tax for properties exceeding that amount.

2. Capital Gains Tax: If the property's value has appreciated since its original purchase, transferring it to an LLC might be considered a taxable event, potentially triggering capital gains tax. However, if the LLC is a single-member entity classified as a disregarded entity for tax purposes, the transfer generally has no immediate tax consequences.

3. Property Tax Reassessment: Some jurisdictions reassess property value upon transfer, which can lead to higher property taxes if the assessed value increases.

4. Mortgage Considerations: Transferring property with an existing mortgage to an LLC may activate a due-on-sale clause, allowing the lender to demand full repayment of the loan.

5. Gift Tax: If the LLC doesn't compensate you for the property's full market value, the transfer might be considered a gift, potentially subjecting you to gift tax. The IRS mandates that donors of a gift pay the gift tax, which can be up to 40%, depending on the value of the property.