Should I put my rental (plan to sell) in an LLC to avoid C-gains?

[Caleb Dryden]

Here's the scenario...

My wife and I lived in this house for 4 years, rented it out the last 4 and are thinking about selling it. I'm wondering if there are any advantages to putting in an LLC right before I sell it in order to avoid paying more on my taxes this year? I know I'll have to pay capital gains regardless but wanted to see if there was something I'm missing here. Thanks in advance for your feedback.

[Eamonn McElroy]

Hello Caleb,

The default tax entity classification for a single-member LLC (SMLLC) is a "disregarded entity". For federal income tax reporting this means the SMLLC is dissolved and there's no distinction between the SMLLC's assets/income and the owner's assets/income.

The tax treatment of you holding the property directly vs through a SMLLC taxed as a disregarded entity will be 100% the same. However you'd be out the LLC filing fees in the latter situation, so the LLC would appear to be disadvantageous if viewed solely through the lens of income tax compliance.

If you're looking to avoid tax I'd suggest you read up on a "like-kind exchange" aka a "1031 exchange".  Your CPA/EA will be able to elaborate.

-Eamonn