Section 121 with LLC

[Sim Xing]

I am an real estate agent and investor in CA. 

Me and my wife have bought a condo and used as our primary residence from 2016 to May 2021.

We rented the house out to tenants in May 2021.

In July 2022, we transferred title of the rental property to an LLC owned by me and my wife(50/50 partners).

In June 2023, we sold the property under the name of the LLC, and resulted a $400k capital gain.

My questions are follows:

1. Are we still qualified for Section 121 Exclusion even if the house was sold under our LLC's name?

2. My current CPA informed me that since the property was owned by the LLC for less than a year, the capital gains would be treated as ordinary income. Is that correct?

3. I will be qualified for Real Estate Professional Status this year, what can I do to minimize my tax liability for 2023?

Would love to get some advice on the situation by BP community

Thanks

[Katie Balatbat]

@Sim Xing

A few points for your consideration - be careful in listening to advice to those who are familiar with community property states and whether your LLC can be considered a single-member LLC/disregarded entity. Generally disregarded entities for income tax purposes are treated as one and the same with the taxpayer, which may change the analysis (if we assume you and your spouse own the LLC as community property). The regulations to the code section may be particularly useful for that. You also may want to look into depreciation recapture and periods of non-qualified use and how that may affect the credit that could be available under IRC 121.

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.