Transferring property title

2 posts in this topic

In 2000, while an Ohio resident, I purchased a property in Colorado. Because I had intended to resell the property in fractions, I set up an Ohio SMLLC to hold title in the property.

We are now Arizona residents and use the property as a vacation home. It has never been rented or commercialized in any way.

Question 1 - would a future sale of the Colorado property be considered a taxable event in Ohio since the property title is held by an Ohio SMLLC?

Question 2 - If a future sale would be taxable in Ohio because of the way the property is titled, could title be transferred directly to me (or jointly to my wife and myself or, alternatively, solely to my wife) without triggering a transfer tax in Colorado?

Question 3 - Would a Quit Claim Deed be sufficient to accomplish this transfer?

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Question 1 - would a future sale of the Colorado property be considered a taxable event in Ohio since the property title is held by an Ohio SMLLC?

I’ll assume that “SMLLC” means single member limited liability company. Under the federal entity classification rules in the “check the box” regulations (Treas. Reg. §§ 301.7701-1 through -3), a limited liability company (LLC) organized in the U.S. that has only one owner is by default disregarded as separate from its owner, and thus the income, deductions, and credits of the LLC are treated as the income, deductions, and credits of the LLC’s owner. So, if the owner of the LLC is an individual, the effect of these rules is to treat the LLC as if it were a sole proprietorship of the owner. In short, for federal tax purposes, the LLC is ignored and you are treated as the direct owner of the property.

A LLC with 2 or more owners is treated by default as a partnership for federal tax purposes. Partnerships are not themselves taxed on the income they receive; instead the income flows through the partnership to the owners of the partnership. That requires the partnership to file an information return (Form 1065) and issue Schedules K-1 to each partner to show his/her share of the partnership’s income.

If, however, the LLC elected to be treated as a corporation by filing form 8832 and checking the appropriate box on the form (hence the name “check the box” regulations) then the LLC is taxed the same way a corporation is taxed. Once it elects to be treated as a corporation, it may also elect S-corporation status if it qualifies. S-corporations are treated much like partnerships are.

Ohio, like a number of states, has chosen to treat LLCs the same way that the federal government does. See the Ohio Revenue Department CF-1997-01 release that provides the ruling on that topic. That means that a single member LLC that has not elected corporate status will be disregarded and will be instead treated like a sole proprietorship. In that case, the sale of the land in Colorado would not be taxed by Ohio and no returns of any kind would need to be filed there. You would, however, have to file a return in Colorado and would pay Colorado income tax on any gain realized. Arizona will tax it as well since you are residents there, but will give you a credit for the tax you pay to Colorado. As a result you are not double taxed on the gain.

You have one complication to all this. You live in a community property state (Arizona). If your spouse has a community property interest (which is likely) in the LLC, then she is effectively a co-owner of the LLC and that makes the LLC a partnership, not a sole propriestorship. That would necessitate the filing of the Form 1065 for the partnership and may require a filing in OH, too. While there is still likely no tax to pay in OH since there is no income derived in OH, the extra filings and the possibility of a nonresident withholding regime in Ohio can make this troublesome. It would also mean a partnership filing in Colorado, too, with the potential for a withholding requirement there. In short, it gets a lot more complex and messy if it is a partnership rather than simply a sole proprietorship. Fortunately, the IRS gives you a way to solve that problem by allowing you to report it as a sole proprietorship if only one spouse actively participates in the partnership. If both participate, there is an option to report the income as a husband and wife joint venture, which is distinct from a partnership and ordinarily avoids having to file a Form 1065. See the instructions for Schedule C for more information on that.

In short, you need to be a bit careful in how you report things for the LLC, but you can effectively treat it as a sole proprietorship and thus avoid having to do any filings in Ohio. You’ll just have Colorado and Arizona taxes to contend with that way.

It is also possible to move the state of organization of the LLC from Ohio to Arizona or Colorado, too, though the cost of that may not be worthwhile if all you are going to do is hold a vacation property in the LLC.

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