Section 121 - LLC Partnership

Client bought a farmhouse 3 years ago in a H&W Partnership. The intent was to operate it as a farm and then run the house as an AirBNB. They recently decided to move into the house as a primary residence and just operate the farm.

My thought is that he should move the house out of the Partnership and into their names so that they can get the benefit of Section 121 when they sell it as I do not think it would qualify if owned by the LLC. There is no mortgage. Deed is in the LLC name. Am I correct or off base here?

How was the house used for the past 3 years? I'm guessing either BnB or farm related and was depreciated. Or did it stand idle/empty?

Consider one of the spouses transferring all of their interest in the LLC to the other spouse (thereby making it a SMLLC taxed as a DRE). Attorney can draw it up. This may be more favorable to re-titling if transfer taxes are an issue.

The period of time that the house was operated as an AirBNB would probably be treated as "nonqualified use" under section 121(b)(5). This could reduce the amount of gain that is eligible for the exclusion.

Strike this --- if the LLC bought the house and farm, then the individuals would not be treated as owners for purposes of the "nonqualified use" provisions.

If you want to ever get the 121 exclusion, then yes, get it out of the partnership since it won't qualify when owned by a partnership.

Thank you. it just sat empty for the last 3 years. It was never rented.

That is a good idea ManVsTax. It might be the easier way to go.

Can you separate the personal residence house from the farm business? I'm assuming there is land, and that the entire thing is one piece of real estate.

Thank you. it just sat empty for the last 3 years. It was never rented.

Well, then, where did they live for the last 3 years?

As I remember the value of th house on the day it is turned into a residence is the value used for calculating the 121 gain. When is sells.

As I remember the value of th house on the day it is turned into a residence is the value used for calculating the 121 gain.. Not if it's higher than adjusted basis at that date.

But we still don't know what it was used for for three years.