The Tax Consequences of Transferring Property to LLC

Last Updated: April 1, 2025

Imagine one of your employees is out on a job, driving a company vehicle, and falls asleep at the wheel. The accident is serious… multiple cars are damaged, injuries are involved, and the lawsuits start stacking up. It’s the kind of nightmare scenario every business owner hopes to avoid.

Now, here’s the question: who’s liable?

If your business owns the vehicle directly, your company is on the hook. But if you're operating without any legal separation between your business and personal life, your home, retirement accounts, and other personal assets could be at risk too.

That’s where limited liability comes in. It’s why so many business owners move property, like vehicles or real estate, into an LLC. On the surface, it seems like a smart way to protect what you’ve built by rethinking how you manage liability, cash flow, and even your business’s tax and accounting services altogether. 

But what seems smart legally can carry hidden tax consequences. And if you’re not looking at the full picture, that protection could come at a much higher cost than you expect.

Why Business Owners Form LLCs for Their Property

On the surface, putting property into an LLC looks like a smart move. For many business owners, it feels like you're taking steps to protect what you've built. In reality, the decision comes with trade-offs that most people don’t fully explore. To make the right move, you need to understand what you're gaining and what you might be giving up.

Why Everyone Says 'Put It in an LLC

Limited Liability Protection

This is often the headline benefit. If someone slips on your commercial property or there’s a serious accident involving a company-owned asset, the LLC acts as a shield between the liability and your personal finances. It limits exposure, keeping claims within the boundaries of the business. For property owners, this separation can provide peace of mind—especially when the stakes are high.

Tax Benefits

Some business owners also expect tax flexibility. An LLC can be taxed as a sole proprietorship, partnership, or even an S corp, depending on how it's set up. This opens the door to strategic income allocations, expense tracking, and potential deductions. But those benefits depend heavily on the rest of your financial structure. Without alignment, the LLC might create complexity instead of savings.

The Hidden Costs & Complications No One Tells You About

Here’s where things often go sideways: transferring property into an LLC might look like a smart move, but without a broader financial strategy behind it, it can quietly chip away at your equity and cash flow. Why? Because what seems protective on the surface can trigger a cascade of tax consequences, lender issues, and compliance costs most business owners never see coming.

The risks usually hide in the fine print. Lenders might object to the transfer. Filing fees and compliance requirements start stacking up. And long-term tax benefits you assumed were in place, like a stepped-up basis for your heirs, may disappear.

None of this shows up on a basic “how to form an LLC” checklist. These landmines are buried in contract clauses, tax code, and lending terms, and they often get triggered because the move wasn’t part of a bigger financial plan.

However, this isn’t a warning against forming an LLC. 

It’s a reminder to make a strategic decision, one that protects your wealth instead of quietly undermining it.

How Transferring Property to an LLC Could Impact Your Cash Flow

Moving property into an LLC seems simple…until the tax bill shows up. What many business owners don’t realize is that the transfer can trigger unexpected tax consequences that hit your cash flow, long-term strategy, and legacy planning.

Capital Gains & Transfer Taxes

In many cases, the IRS views a property transfer into an LLC as a sale, especially if there’s a mortgage involved. That means you could be taxed on the gain, even if you didn’t sell the property to anyone else. Local governments may also impose transfer taxes, treating it like a change in ownership. That tax adds up quickly, especially on high-value assets.

The ‘Due-on-Sale’ Clause

If your property is still under a mortgage, the lender has a say in how ownership is handled. Many loan agreements include a due-on-sale clause, which gives the lender the right to call the loan if the property changes hands. Transferring into an LLC can trigger that clause and put you in a high-stakes conversation about refinancing or paying the balance early.

Property Tax Reassessment

Some states automatically reassess property values when ownership changes—even if you’re just transferring it into your own LLC. That can lead to higher property taxes year over year. What was once a manageable expense can start creeping up and eroding your margins.

Recording Fees & Compliance Costs

Each state has different requirements for recording property transfers. You may face title-recording fees, additional administrative costs, and ongoing reporting requirements. These might seem minor individually, but they compound over time.

Loss of Stepped-Up Basis

If the property stays in your name, your heirs typically receive a stepped-up basis, which reduces their capital gains tax when they sell. Moving the property into an LLC can eliminate that benefit, increasing the future tax burden on your family.

Structuring an LLC the Right Way

While the mechanics of setting up an LLC are straightforward, the strategy behind how it’s built, managed, and integrated into your broader financial picture is where most business owners fall short.

Too often, property gets dropped into an LLC without thinking through ownership structure, tax implications, or long-term goals. Decisions get made in isolation, disconnected from estate planning, lending terms, or how income should flow through the business.

When structured thoughtfully, an LLC can protect assets, simplify decision-making, and create more financial control. It gives you flexibility, protection, and control, but only if it’s built with intention. That means thinking about how profits are distributed, how the entity aligns with your tax strategy, and what impact it may have on succession or exit planning.



Get the Tax Strategy Your Business Deserves with Nth Degree

Here’s where things often go sideways: transferring property into an LLC might look like a smart move, but without a broader financial strategy behind it, it can quietly chip away at your equity and cash flow. Why? Because what seems protective on the surface can trigger a cascade of tax consequences, lender issues, and compliance costs most business owners never see coming.

The risks usually hide in the fine print. Lenders might object to the transfer. Filing fees and compliance requirements start stacking up. And long-term tax benefits you assumed were in place, like a stepped-up basis for your heirs, may disappear.

None of this shows up on a basic “how to form an LLC” checklist. These landmines are buried in contract clauses, tax code, and lending terms, and they often get triggered because the move wasn’t part of a bigger financial plan.

However, this isn’t a warning against forming an LLC. 

It’s a reminder to make a strategic decision, one that protects your wealth instead of quietly undermining it.

How Transferring Property to an LLC Could Impact Your Cash Flow

Moving property into an LLC seems simple…until the tax bill shows up. What many business owners don’t realize is that the transfer can trigger unexpected tax consequences that hit your cash flow, long-term strategy, and legacy planning.

Capital Gains & Transfer Taxes

In many cases, the IRS views a property transfer into an LLC as a sale, especially if there’s a mortgage involved. That means you could be taxed on the gain, even if you didn’t sell the property to anyone else. Local governments may also impose transfer taxes, treating it like a change in ownership. That tax adds up quickly, especially on high-value assets.

The ‘Due-on-Sale’ Clause

If your property is still under a mortgage, the lender has a say in how ownership is handled. Many loan agreements include a due-on-sale clause, which gives the lender the right to call the loan if the property changes hands. Transferring into an LLC can trigger that clause and put you in a high-stakes conversation about refinancing or paying the balance early.

Property Tax Reassessment

Some states automatically reassess property values when ownership changes—even if you’re just transferring it into your own LLC. That can lead to higher property taxes year over year. What was once a manageable expense can start creeping up and eroding your margins.

Recording Fees & Compliance Costs

Each state has different requirements for recording property transfers. You may face title-recording fees, additional administrative costs, and ongoing reporting requirements. These might seem minor individually, but they compound over time.

Loss of Stepped-Up Basis

If the property stays in your name, your heirs typically receive a stepped-up basis, which reduces their capital gains tax when they sell. Moving the property into an LLC can eliminate that benefit, increasing the future tax burden on your family.

Structuring an LLC the Right Way

While the mechanics of setting up an LLC are straightforward, the strategy behind how it’s built, managed, and integrated into your broader financial picture is where most business owners fall short.

Too often, property gets dropped into an LLC without thinking through ownership structure, tax implications, or long-term goals. Decisions getmade in isolation, disconnected from estate planning, lending terms, or how income should flow through the business.

When structured thoughtfully, an LLC can protect assets, simplify decision-making, and create more financial control. It gives you flexibility, protection, and control, but only if it’s built with intention. That means thinking about how profits are distributed, how the entity aligns with your tax strategy, and what impact it may have on succession or exit planning.

Get the Tax Strategy Your Business Deserves with Nth Degree

If you're thinking about putting property into an LLC, or already have and want to make sure it's set up to serve you long-term, we’re here to help.

Schedule a call with our team to make sure your structure supports your strategy, not the other way around.