The tax consequences of transferring property from an LLC to an individual depend on three things: how the LLC is taxed, what transfer method you use, and whether the property carries a mortgage or has been depreciated. A single-member LLC transferring property to its sole owner usually triggers nothing at the federal level. A partnership-taxed LLC distributing property to a member is generally tax-free too, with important exceptions for debt and prior depreciation. An LLC that elected corporate taxation faces the harshest treatment, potentially including double tax on the same appreciation.
Start With How Your LLC Is Taxed
Every answer below turns on this. Check your most recent business tax return. Form 1065 means the LLC is taxed as a partnership. Form 1120 means C corporation. Form 1120-S means S corporation. If you file no separate business return and report the LLC’s activity on your Schedule C or E, you have a single-member LLC treated as a disregarded entity.
A single-member LLC is not separate from its owner for federal income tax purposes unless it filed Form 8832 to elect corporate treatment.1Internal Revenue Service. Single Member Limited Liability Companies Moving property from that LLC to yourself is moving it from one pocket to another, and no federal income tax event occurs. State transfer taxes and recording fees can still apply.
Multi-member LLCs default to partnership taxation, and Subchapter K of the Internal Revenue Code governs what happens on a transfer. That is where most of the rules that follow live. If your LLC elected corporate treatment, skip ahead to the corporate section, because different code sections apply and the outcome is markedly worse.
Distributing Property From a Partnership-Taxed LLC
Distributing property to a member is the common route, and the code handles it gently. The LLC recognizes no gain or loss on the distribution, and the receiving member generally recognizes no gain either.2Office of the Law Revision Counsel. 26 US Code 731 – Extent of Recognition of Gain or Loss on Distribution
The concept that governs whether you owe anything is your outside basis: your adjusted tax basis in your LLC membership interest. You start with what you contributed, add your share of profits and later contributions, and subtract prior distributions and your share of losses. As long as the value of what you receive doesn’t push your cumulative distributions past that outside basis, the distribution itself isn’t taxable.
The Basis of the Property You Receive
The property arrives in your hands carrying the LLC’s adjusted basis, not its current fair market value.3GovInfo. 26 US Code 732 – Basis of Distributed Property Other Than Money There’s a ceiling, though. Your basis in the distributed property cannot exceed your remaining outside basis after any cash also distributed.
Consider the effect. If the LLC’s basis in a rental building is $200,000 but your outside basis is only $150,000, your basis in the building becomes $150,000. No tax when you take the property, but when you sell it later your gain is $50,000 larger than it would have been. The tax is deferred, not erased.
When Debt on the Property Turns the Distribution Taxable
This is where people get blindsided. If the property has a mortgage you assume, or the distribution otherwise reduces your share of the LLC’s liabilities, the IRS treats that liability reduction as a cash distribution to you.4Office of the Law Revision Counsel. 26 US Code 752 – Treatment of Certain Liabilities If that deemed cash exceeds your outside basis, you recognize gain on the excess.2Office of the Law Revision Counsel. 26 US Code 731 – Extent of Recognition of Gain or Loss on Distribution
Say your outside basis is $100,000, and the LLC distributes a building to you with a $150,000 mortgage you assume. The $150,000 liability shift counts as a cash distribution. That’s $50,000 above your basis, and you owe capital gains tax on that $50,000 even though no money changed hands. Leveraged real estate distributions get people here regularly, because members think of distributions as inherently non-taxable.
Depreciation Recapture on Rental and Commercial Property
If the LLC has depreciated the property, the gain that eventually gets recognized isn’t all taxed at ordinary long-term capital gains rates. Gain attributable to prior depreciation is recaptured.5Office of the Law Revision Counsel. 26 US Code 1250 – Gain From Dispositions of Certain Depreciable Realty For real property, this unrecaptured Section 1250 gain faces a maximum federal rate of 25%.6Internal Revenue Service. Capital Gains, Installment Sales, Unrecaptured Section 1250 Gain
In a sale from the LLC to a member, recapture applies immediately to the portion of gain equal to accumulated depreciation. In a partnership-taxed distribution, the recapture potential travels with the property, and it hits when the member later sells. If the LLC has claimed $200,000 of depreciation on a building over the years, that $200,000 is potentially subject to the 25% rate whenever the taxable disposition finally happens.
Selling the Property to a Member Instead
An LLC can also sell property to a member at fair market value rather than distribute it. The LLC reports gain or loss like any other sale, based on sale price minus adjusted basis, and that result flows through to all members on their K-1s in proportion to ownership.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Because the buyer is also an owner, the IRS scrutinizes the price. A qualified independent appraisal protects the transaction from being recharacterized.8Internal Revenue Service. Sales and Other Dispositions of Assets
Losses Are Disallowed if You Own More Than Half
If the LLC sells at a loss to a member who owns more than 50% of the LLC, the loss is disallowed entirely under the related-party rules.9Office of the Law Revision Counsel. 26 US Code 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers Neither the LLC nor the other members get a deduction for it. The buying member can later offset gain on a future sale of the same property by the previously disallowed amount, but if the property never appreciates back, that loss is gone.
Selling Below Fair Market Value
If the LLC sells to a member for less than fair market value with the intent to confer a benefit, the IRS treats the transaction as part sale and part gift.8Internal Revenue Service. Sales and Other Dispositions of Assets Gift tax rules then apply to the shortfall.
If Your LLC Elected Corporate Taxation
For a C corporation LLC, distributing appreciated property produces a genuinely painful outcome. The LLC must recognize gain as if it sold the property at fair market value, even though no sale happened and no cash arrived.10Office of the Law Revision Counsel. 26 US Code 311 – Taxability of Corporation on Distribution The LLC pays corporate income tax on that deemed gain. The receiving member then treats the property as a dividend, taxed again at the individual level. The same appreciation is taxed twice.
An S corporation LLC still recognizes gain at the entity level on a distribution of appreciated property, and that gain flows through to all shareholders in proportion to ownership. Shareholders who receive nothing still pay tax on gain from property that went to someone else, which is a common source of friction.
When the LLC is taxed as a corporation, a straightforward sale to the member at fair market value often works out cleaner than a distribution, because at least the entity receives cash to cover its own tax.
Gift Tax If the Transfer Isn’t for Value
When the LLC transfers property without receiving full value in return, the IRS may treat the shortfall as a gift from the members to the recipient in proportion to ownership.
For 2026, the annual gift tax exclusion is $19,000 per recipient.11Internal Revenue Service. What’s New – Estate and Gift Tax Each member is treated as making a gift equal to their ownership share, and each can use their own $19,000 exclusion. If any single donor’s gift to any single recipient exceeds $19,000, that donor must file Form 709.12Internal Revenue Service. Gifts and Inheritances Amounts above the annual exclusion reduce the donor’s lifetime unified estate and gift tax exemption, which is $15,000,000 for 2026.
Rates the Gain Will Be Taxed At
Property held longer than one year qualifies for long-term capital gains rates. Property held one year or less is taxed as ordinary income.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
For 2026, the federal long-term capital gains brackets are:
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15% from those thresholds up to $545,500 (single) or $613,700 (married filing jointly)
- 20% above $545,500 (single) or $613,700 (married filing jointly)
An additional 3.8% Net Investment Income Tax applies to capital gains for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).13Internal Revenue Service. Questions and Answers on the Net Investment Income Tax Those thresholds are not indexed for inflation. A taxpayer in the top bracket subject to the NIIT faces an effective 23.8% federal rate on long-term gains, before any 25% depreciation recapture and before state tax.
State Taxes and Transfer Taxes Still Apply
Federal treatment isn’t the whole story. Many states tax capital gains as ordinary income, with top rates running from under 3% to over 13%. Some states impose no individual income tax and don’t tax capital gains at all. Because the state where the property sits and the state where the member resides may differ, multi-state filing obligations can arise.
Real estate transfers also often trigger state or local transfer taxes based on price or assessed value, typically ranging from a fraction of a percent to around 2%, with some counties and cities layering their own taxes on top. Some states exempt transfers between an LLC and its members or transfers incident to dissolution. Check the rule for your jurisdiction before assuming the transfer is free of state cost, because recording fees apply regardless.