Unit 2306, Gallery Buckhead Condominiums, Atlanta, GA. Currently owned by Navid & Marjan via a Georgia LLC. Intended use: RF and spouse primary residence. Goal: transfer LLC interests at a discount, live in the unit, preserve long-term tax benefits.
| Item | Value |
|---|---|
| Purchase price (2021) | $800,000 |
| Renovation (personal funds) | ~$400,000 |
| Adjusted basis (after doc) | $1,200,000 |
| Current FMV | ~$1,000,000 |
| Built-in loss | ~$200,000 |
| LLC status | Active, Georgia LLC |
The $400K renovation was paid from personal funds and is NOT yet in LLC basis. Must be formally documented as capital contributions before any transfer.
LLC inside basis = $800,000.
LLC resolution + updated capital accounts. Inside basis → $1,200,000.
Gift tax value = FMV with 25–35% minority + marketability discount. Gift of 50% interest: pre-discount $500K → post-discount ~$325–375K. Reported on Form 709. Annual exclusion: $36K/yr (RF + spouse).
RF takes N&M's adjusted outside basis — NOT the discounted gift value. RF basis in 50% interest = 50% × $1,200,000 = $600,000.
RF owns 100% → dissolve. RF takes condo at carryover basis (~$1,200,000 minus accumulated depreciation). No gain recognized.
With $1.2M basis, no taxable gain until appreciation exceeds $1.2M. Section 121 ($500K exclusion, married) meaningful only above ~$1.7M sale price.
| Risk | Mitigation |
|---|---|
| Step transaction doctrine | Real rental period, FMV rent, time gap between steps |
| Sham LLC challenge | Actual rental activity, proper books, arm's-length rent |
| Valuation discount challenge | Qualified appraiser, conservative 25% discount |
| Missing 1065 penalties | File immediately, request abatement |
| Depreciation recapture | 25% on accumulated depreciation at sale — unavoidable but limited by high basis |
With $1.2M basis and $1M FMV, there is no tax urgency to transfer. Section 121 is meaningless until appreciation exceeds $1.7M. Keeping in LLC preserves liability protection, portfolio flexibility, and drop-and-swap optionality for 1031. Main cost: ~$500–2K/yr Georgia homestead exemption foregone.
| When | Action |
|---|---|
| Now | File missing 1065s, document $400K reno as capital contributions |
| Year 1 | Appraisal, gift 50%, begin rental at FMV |
| Years 1–3 | Rental period, annual 1065s, depreciation running |
| Years 2–3 | Gift remaining 50% in tranches |
| Year 3+ | RF moves in as primary residence |
| Year 5+ | 2+ years primary residence — Section 121 clock running |
| Sale | No meaningful tax exposure until >$1.7M; dissolve LLC before sale |