My siblings and I formed a LLC when our parents gifted the family cottage to us. We worked with an attorney to ensure the amounts per member was below the exposure limit for taxes. We recently sold the cottage and as part of the closing a 1099S was filed. My question is around how the IRS will be able to link the fact that this entity was originally gifted to us so we will not be expected to pay capital gains taxes on the proceeds. It should be noted that the closing was naturally done in the name of the LLC (vs. each individual).

The answer to this question really depends on the type of legal entity your business is operated through. Limited Liability Company with Multiple Owners, Taxed as a Partnership is similar to S corps in that the individual items of income and loss are not taxed within the partnership, but are passed through to the individual partners on their Sch K1 s of 1065and taxed on their individual income tax returns on 1040s. Thus, any sale of a house by the partnership would be taxable to the individual partners not the LLC, partnership. If the LLC owned the house for more than 1 year then the gain would be eligible for the long-term capital gains tax rate, which is currently0% ~ 15%



When you sell your home, federal tax law requires lenders or real estate agents to file a Form 1099-S with the IRS and send you a copy if you do not meet IRS requirements for excluding the taxable gain from the sale on your income tax return. Also to avoid violating IRS reporting rules, the lender or agent may send you a 1099-S even if you qualify for the taxable gain exclusion.

Thank you for your response. It makes sense. However, the basis of the question remains unclear. Given the fact that the original ownership was the result of gifting, doesnt that come into significance with regard to capital gains tax exposure?

very critical question donot think the gifting comes into significance with regard to CG tax exposure itself;HOWEVER,it does in determining capital gain amount. When the cottage was gifted to you, your income tax basis in the property became the same as the person who made the gift to you ,the donor. since you received it by gift, you need to take the basis of the person who gave you the asset.
To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it if any but mosty no gift tax imposed. If the FMV of the property was less than the donor's adjusted basis, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustment to basis during the period you held the property. Your basis for loss on its sale or other disposition is the FMV at the time you received the gift plus or minus any required adjustment to basis during the period you held the property. If the FMV of the property was equal to or greater than the donor's adjusted basis, your basis for gain or loss on its sale or other disposition is the same as the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of the gift tax paid, depending on the date of the gift. So,Once you determine the cost basis as above, You will determine gain ;Your pro-rata share of Amount realized(Sales - Expenses on sales) minus Your pro-rata share of Adjusted cost basis (cost basis determined above plus any cost of improvements to the property etc).
I would assume that the FMV on the date of the gift will be higher than the cost basis of the donor, considering the property prices.
If that's the case than the cost basis will be donors basis + all or part of gift tax paid, if any + improvements made by you after the house was signed over to us and the time of sale.