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Selling Property Owned by LLC (A Guideline)

Max Smith

Reading Time: 7 minutes

Do you want to sell your LLC property for cash to pay debt or invest? Selling property owned by an LLC is possible in every state of the United States. But you must maintain a legal procedure and provide the necessary documents.

Every state has its own rules for LLC property sales. If you steadily follow the rules, the property-selling process can be smooth. Then, you can find the perfect way to sell your LLC’s property for a fair price. However, there will be some tax consequences.

Do you want to know the necessary details and tax consequences of selling property owned by an LLC? Then, let’s dive deep!

In a short sense, it is the LLC (Limited Liability Company) that owns the property. It means that the individual members of the LLC do not own the property, at least not directly. 

What the members have are the ownership interests in the company. The members get profit according to their investment contribution. 

On the other hand, the LLC represents the ownership of the property. This is because the LLC is a separate legal entity or person. So, it not only owns but also manages the property. It has the right to buy or sell a property.

Furthermore, an LLC maintains some formal steps to sell a property. Let’s take a look.

Steps of Selling Property Owned by LLC

Selling an LLC-owned property in the real estate realm requires a legal and formal process. Thus, the following steps will guide you through the intricacies of selling a property owned by an LLC. 

1. Evaluate the Market

To devise a strong selling strategy, first evaluate the market. Assess recent sales to understand market trends, like price fluctuations and buyer preferences. Evaluate the property’s features, condition, and potential. 

Moreover, you can take advice from real estate agents and brokers from the local market. They will offer some valuable insights. Also, understanding the LLC’s and its members’ legal and tax implications is important as well.

2. Prepare to Sell

To appeal the property for potential buyers, start by reviewing the condition of the property. A thorough inspection will help you address any maintenance issues. For instance, plumbing leaks, electrical problems, or structural concerns.

Decluttering will make the property visually appealing. A well-kept yard, fresh and vibrant painting, trimmed landscape, and an intact roof enhance the property’s curb appeal.

Undoubtedly, updating the interior features and appliances matters too. Removing potential hazards meets the safety standards. Overall, creating a welcoming atmosphere increases the property’s market value.

3. Determine the Price

Determining the price for an LLC-owned property requires strategic consideration. Identify your property’s unique features after the market evaluation and sale preparation. Moreover, don’t forget to mark any factor of recent upgrades or significant repairs. It will help you to set a reasonable market price. 

Lastly, get consultations from real estate professionals. It will Include holding costs like taxes, insurance, mortgage payments, maintenance, and utilities while setting the price.

4. List the Property

Once your property is ready, list it on relevant platforms. After setting a competitive and realistic price, prepare the necessary documentation like surveys, titles, and tax records. Then, compile the information about its features and hire a real estate agent or broker from the local market.
Also, note that investing in high-quality photography to provide virtual tours will maximize exposure on multiple online platforms.

5. Close the Sale

After negotiating the price and accepting the final offer, it’s time to draft and sign a legally binding agreement. It includes all the terms and conditions. All parties should be aware of their financial obligations. 

So, collect the necessary signatures and approvals of the LLC members to proceed with the sale. Conduct all transactions securely. Finally, submit the documents to the county recorder’s office. 

Now you may wonder, what do you need to do in selling your LLC property? Find out the answer to this in the next section!

What You Need to Do in Selling Your LLC Property

If you are selling LLC-owned property for the first time, there is a possibility you might mess up the process. That’s why it’s crucial to take the following steps to ensure a smooth transaction while selling a property owned by an LLC. So, what are these steps? Let’s take a look!

1. Good Standing

Obtain proof that the LLC is in “Good Standing” with the respective State. You might need it to prove your LLC’s clear image before closing the sale.

2. Operating Agreement

Review the LLC’s Operating Agreement to understand procedures and requirements. You may find some rules in the operating agreement that will guide you in the property-selling procedure.

3. Approval

Get all the members in a meeting and count votes. It works to get approval from all the LLC members to sell the property in writing.

4. Pay the Debts

Settle all the debts and liabilities associated with the property before selling it to a third party. In case you have a mortgage on the property, you cannot sell it 

5. Necessary Documents

When the selling property is owned by an LLC, a few documents will be requested in the transaction. So, make sure to gather the copies of the following: 

  • The Operating Agreement
  • The Articles of Organization
  • EIN of the LLC
  • Proceeds Disbursement Authorization

6. Notify

Inform the local authorities and other relevant individuals about the ownership change.

Ways of Selling LLC-Owned Property

You can find various strategies and methods to sell an LLC-owned property. Here are some points to consider:

  1. Use the traditional way and hire a real estate agent or broker to list the property on the open market.
  2. Advertise the property in MLS (Multiple Listing Services) and other online platforms.
  3. The LLC can be more involved in marketing its property to save on agent commissions. 
  4. If there is urgency, the LLC can put its property in a real estate auction.
  5. The LLC can explore wholesaling and sell the property at a discounted price. The buyer will sell it for a profit later.
  6. Utilizing the 1031 exchange will help to defer the capital gain taxes.
  7. A tenant can have the property on lease if there is an option to purchase later.
  8. An LLC property can be exchanged for other assets like stocks, bonds, or another piece of real estate. 
  9. Selling in real estate crowdfunding platforms can provide liquidity and diversification.

Note that it does not matter what method you choose to sell LLC owned property, there will be tax consequences. But what exactly are these consequences? Read on to find out!

Tax Consequences in Selling a Property Held by an LLC

An LLC provides personal liability and asset protection with tax benefits. Most of the time, members prefer partnership taxation to avoid double taxation. 

  • Capital Gains Tax

If you sell real estate for more than you paid, including the improvements but subtracting depreciation, there is a profit gained. That profit is a capital gain. Its tax rate depends on the length of property ownership. 

You pay a lower tax rate for a long-term capital gain of more than a year. In case of less than a year (short-term gain), you pay the tax with a higher ordinary income rate.

  • Depreciation Recapture Tax

After a certain period, deducting a portion of your rental building property value can lower your taxes. It’s known as depreciation. 

Although it’s helpful, you have to pay 25% tax to the IRS on that deducted amount if you sell that property. This is called depreciation recapture. 

  • 1031 Exchange

When you sell an LLC property, capital gains taxes and depreciation recapture tax can substantially impact the net profits. In this case, the real estate investors use the 1031 exchange as a tactic. They sell a property and reinvest in a similar one. But the rules include:

  • Identify a replacement property within 45 days.
  • Complete purchasing new property within 180 days.
  • Use a qualified intermediary to ensure IRS compliance.

So maintain the rules and use a 1031 exchange for your LLC

  • Loss Management

Passive incomes balance the losses from passive activities within an LLC. Usually, selling an LLC interest won’t shut down the LLC for tax reasons. 

What’s important is the amount of money the member invested originally, plus or minus what the LLC gained or lost. This decides how much tax to pay while selling an LLC interest.

Conclusion

As the LLC owns the property, it can sell it to anyone. But the procedure must be followed by some formal steps. Otherwise, it will be illegal and cost you a penalty. 

So it’s essential for you to include all the necessary documents and find a suitable way to sell the property. One more thing: Don’t forget to pay the taxes that will be due after selling the property.

In the end, selling property owned by an LLC is legal and a way to transfer property to another party or individual. Seek the help of an expert service provider to avoid any legal trouble during the procedure.

Key Points

  • Your LLC is the legal owner of its property. So, it can sell its property to any individual or another business entity.
  • It may get more manageable if you follow the selling process step by step. For instance, evaluating the market, preparing the property for sale, picking up a fair price, and more. 
  • You just cannot sell your property informally. You may need to prove it’s good standing, follow the operating agreement rules, pay the debts, and more. 
  • Hire a broker or agent commissioner to sell your LLC property. Plus, you can also post on online and crowdfunding platforms. Also, utilizing the 1031 exchange is a good idea for selling your LLC-owned property.
  • There will be capital gain taxes on the property that your LLC sold. 
  • Be ready to pay 25% tax to the IRS on that deducted amount if you sell the LLC-owned property.
  • Use a 1031 exchange to sell a property and reinvest in a similar one.
  • The LLC’s gain or loss determines how much tax to pay while selling its property.

Frequently Asked Questions

Can I sell my house to my own LLC to avoid capital gains tax?

Yes, If you have a single-member LLC, you can sell your house to your LLC to avoid capital gains tax. The Treasury Regulations allow capital gains to be excluded. However, the rule is not acceptable for a partnership or a company LLC. It is only for a disregarded entity that is a single-member LLC. 

Can I transfer property from an LLC to an individual?

Of course! Show the LLC is in “Good Standing” and make a quitclaim deed. It will help to remove LLCs’ claims from the property and instantly transfer them to an individual or entity.

Max Smith - LLC Formation

He is a seasoned entrepreneur and legal expert at LLC Formation Hub. With a stellar track record in both business and law, Max simplifies the complexities of LLCs. His practical insights, featured on LLC Formation Hub, empower entrepreneurs across the USA. Max merges business finesse with legal acuity to guide businesses toward success.


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