Transferring to LLC. Is capital gain tax due?

[Eddie Ziv]

I'm in a process of transferring some of my properties to an LLC entity. These are four properties that were bought within a period between 3-14 month ago. The LLC is structured in such way that my wife and I own two percent and the predominantly shares of 98% owned by another LLC in which my wife and I have 50% of the share each.

The properties bought for a total amount of $39,000 in cash (No liens). Since there were substantial improvements done or in the process of being done, I estimate the current total value at $142,000. My question is, do I have to pay capital gain for the difference?
My assumption is no since there was no moeny exchanged and by structure, LLC is a pass-through entity when it comes to taxes.

Please, don't guess. Reply only if you have an educated answer.

Thanks.

[Bill Walston]

Guess I'll give you the standard atty/acct answer Eddie - it depends :-) What are you receiving in exchange for the transfer? If you "transfer" the property to an existing LLC, the LLC will have to either: 1) pay you cash for the property, 2) issue you an additional ownership interest, or 3) issue you a note. That's what will determine the amount of the gain or loss that you would recognize, if any. If you receive nothing in exchange for the property, the transaction would be considered "donated capital" and the LLC would assume your basis in the property. It would be the LLC that will recognize the gain or loss when it disposes of the property.

Hope this is some help.