 LLC
partner loses capital gains tax break
|  Dear
Tax Talk,
Two years ago, I bought 25 acres
of land with two partners through a limited liability company (LLC)
we created to develop a subdivision on the property. However, there
was a house located on the property at the time of purchase, which
has been my primary residence since that time.
I have since refurbished the home and would like to
sell it. The house has been resurveyed to sit on a 3.4-acre lot,
while all the rest of the land has been divided into tracts of various
sizes. Public utilities have been installed and a road has been
built so that now the LLC has 25 sellable building lots. The house
will be deeded solely to me within the next few weeks. Will I have
to stay there for two more years before I sell it in order to avoid
capital gains? Or is it enough that it has been my primary residence
for two-plus years even though the deed is held by an LLC of which
I am only a part?
I want to sell it in order to make money to fund my
law school education and the purchase of a starter home in the area
where I will be studying. Does that make any difference about what
I should do?
Also, I could rent the house to cover its own
mortgage and my new one while I'm in school for three years, but
then would I have to move back into it again to avoid the capital
gains tax? Thanks a lot. -- Jen
 Dear
Jen,
Could you make it any more complicated? Well, to start off, you
have to have owned the home and lived in it for
two years in order to get the $250,000 exclusion. While you have
lived in it for two years, you need to look at the rules on ownership.
The regulations under Internal Revenue Code Section 121 state that
a person will be considered owning a home owned by a single-member
LLC for the period that it was owned by the LLC. Since yours is
not a single-member LLC, you will not meet the two-year ownership
rule if you sell it shortly after it is deeded over to you.
Although you're thinking of selling it to pay for
law school, that really doesn't change the tax treatment. You may
want to consider borrowing against it to pay for college and the
starter home.
The period that you rent the home wouldn't qualify
you for the exclusion. So yes, you would have to move back into
it for two years to later qualify for the exclusion. Since you'll
be realizing income from the lot sales, what is a little more income
if you feel it is right to sell the property and there is no end
run around the rules?
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