Section 121 with LLC

[Wen Chen]

I purchased a SFH in 2018 and lived in it until 2023. In 2023, I converted the property into a rental. Now, I'm considering whether it makes sense to create a LLC and "sell" the SFH to the LLC to take advantage of Section 121's capital gains exclusion, as we still meet the 2 out of 5-year rule, and to potentially increase depreciation value.

Has anyone gone through a similar situation or have advice on the best approach? Would transferring the property to an LLC impact my eligibility for Section 121? Any insights or guidance would be greatly appreciated!

[Katie Ripp]

Your Sec. 121 exclusion would be disallowed. AKA this wouldn't work.

Section 121 explicitly disallows the exclusion for sales to related parties if the transaction is structured to avoid taxes. Specifically:

• 26 U.S. Code § 121(h) states that the exclusion does not apply to sales or exchanges to related persons as defined under 26 U.S. Code § 267(b) or 707(b) if the primary purpose of the transaction is tax avoidance. Related parties include family members (e.g., siblings, spouses, ancestors, and descendants) and entities controlled by the taxpayer.