Capital Gains Tax for LLCs: Rates, Recapture, and Deferrals

The capital gains tax for LLCs almost always follows the owners, not the company. Because the IRS treats most LLCs as pass-through entities, the business itself pays nothing on a sale; each member reports their share of the gain on a personal return and pays at individual capital gains rates. The one common exception is an LLC that has elected C-corporation status, which pays a flat 21% federal tax on the gain at the entity level before anything reaches the owners.

How Your LLC Is Taxed Determines Who Pays

The IRS has no separate tax category for LLCs. It drops each one into an existing bucket, and that bucket controls who writes the check.

Single-Member LLCs

By default, a single-member LLC is a “disregarded entity.” The IRS ignores the LLC and treats you and the business as the same taxpayer. Gain from selling business assets lands on your Schedule D with your Form 1040.1Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses

Multi-Member LLCs

An LLC with two or more members that hasn’t elected corporate status is taxed as a partnership. The partnership files an informational return but pays no income tax. Each member’s share of the gain flows through on Schedule K-1, split between short-term and long-term, and members report those amounts on their own returns.2Internal Revenue Service. Publication 541, Partnerships3Internal Revenue Service. Schedule K-1 (Form 1065) – Partners Share of Income, Deductions, Credits, etc.

LLCs Taxed as S Corporations

An LLC can elect S-corporation treatment by filing Form 2553 and keep the pass-through structure. The S corporation generally pays no federal income tax on capital gains. Shareholders get a Schedule K-1 (Form 1120-S) and handle the tax personally.4Internal Revenue Service. S Corporations

LLCs Taxed as C Corporations

Filing Form 8832 to elect C-corporation status changes the arithmetic. The LLC becomes its own taxpayer and pays a flat 21% on capital gains at the corporate level.5Internal Revenue Service. Entities Holding period does not matter; short-term and long-term gains are taxed the same. If after-tax profits are then distributed as dividends, owners pay tax on them again. That double layer is why most small LLCs stay out of C-corp status.

Figuring the Gain

The taxable gain is the difference between what the LLC receives for an asset and its adjusted basis. Getting basis right matters, because errors here push tax up quickly.

Start with the original purchase price. Add capital improvements that extended the asset’s useful life or increased its value. Subtract any depreciation the LLC claimed, or was entitled to claim, over the years.6Internal Revenue Service. Publication 551 – Basis of Assets That depreciation subtraction is the piece owners most often forget. Buy equipment for $100,000, claim $60,000 in depreciation, and your adjusted basis is $40,000, not $100,000.

From the sale price, subtract selling costs like commissions, legal fees, and transfer costs to get the “amount realized.” Amount realized minus adjusted basis is the gain.

Holding period sets the character. One year or less is short-term; more than a year is long-term.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses The rate difference between the two is large, so timing a sale even a few days past the anniversary can be worthwhile.

Depreciation Recapture Is Taxed as Ordinary Income

Selling a depreciated business asset rarely produces a clean capital gain. The IRS separates true appreciation from the recovery of depreciation deductions the LLC already used, and it taxes that recovered depreciation at higher rates.

Equipment and Other Personal Property (Section 1245)

Equipment, vehicles, and furniture fall under Section 1245. Gain up to the amount of prior depreciation is taxed as ordinary income, not as a capital gain.8Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property For pass-through members in the top bracket, that can mean rates up to 37%. Only gain above the original purchase price qualifies for capital gains treatment, and equipment rarely sells for more than it cost, so most equipment gains are fully ordinary.

Real Estate (Section 1250)

For buildings and structural components, the portion of gain tied to prior depreciation is called “unrecaptured Section 1250 gain” and is capped at a 25% rate. Any appreciation above the original cost basis is taxed at regular long-term capital gains rates.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses Both amounts are reported on Form 4797.9Internal Revenue Service. About Form 4797, Sales of Business Property

2026 Rates for Pass-Through Members

For any pass-through LLC, the rate depends on the member’s total taxable income and how long the LLC held the asset.

Long-Term Gains

Long-term gains use the preferential brackets. For 2026, single filers pay 0% on taxable income up to $49,450, 15% from $49,450 to $545,500, and 20% above $545,500. For married couples filing jointly, the 15% bracket starts at $98,900 and the 20% bracket begins at $613,700. The thresholds count all taxable income, not just the gain.

Short-Term Gains

Short-term gains get no preference. They are taxed as ordinary income at rates from 10% to 37%.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses For a high-income member, that is more than double the long-term rate on the same dollars.

Net Investment Income Tax

Higher-income members also face a 3.8% surtax on net investment income, including capital gains. It kicks in once modified adjusted gross income exceeds $200,000 for singles or $250,000 for joint filers, and those thresholds are not indexed to inflation.10Internal Revenue Service. Net Investment Income Tax Stacked on the top long-term rate, the effective federal rate reaches 23.8%.

C-Corporation Rate

An LLC taxed as a C corporation pays 21% flat on all gains, regardless of holding period. If proceeds are then paid out as dividends, owners pay again at their qualified dividend rate, and the combined burden usually exceeds what a pass-through member would owe.

Asset Sale vs. Membership Interest Sale

Structure changes the tax outcome. Selling the LLC’s assets and selling an owner’s interest in the LLC are very different transactions.

Asset Sales

When the LLC sells its assets, each asset carries its own character. Equipment triggers Section 1245 recapture as ordinary income. Real estate can trigger unrecaptured Section 1250 gain at up to 25%. Goodwill and other intangibles held more than a year get long-term capital gains treatment. Buyers often prefer asset sales because they get a stepped-up basis and larger depreciation deductions going forward.

Membership Interest Sales

Selling your ownership stake is generally the sale of a capital asset, and gain qualifies for long-term rates if you held the interest for more than a year. But if the LLC holds “hot assets,” a portion of the gain is recharacterized as ordinary income no matter how long you owned the interest.11Office of the Law Revision Counsel. 26 USC 751 – Unrealized Receivables and Inventory Items Hot assets include unrealized receivables (including depreciation recapture built into equipment) and substantially appreciated inventory. Running the numbers on this before closing can shift the after-tax result significantly.

Deferral Options

Paying the tax immediately is not the only choice. Two federal programs let LLCs and their members defer gains, each with strict rules.

Section 1031 Like-Kind Exchanges

An LLC can defer gain on the sale of real property by reinvesting into similar real property through a like-kind exchange. Since the Tax Cuts and Jobs Act, only real property qualifies; equipment, vehicles, and other personal property no longer do.12Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Replacement property must be identified within 45 days of the sale and closed within 180 days. Miss either deadline and the whole gain becomes taxable. A qualified intermediary holds the proceeds during the exchange; touching the money yourself disqualifies the transaction.

Qualified Opportunity Zone Funds

Members can defer capital gains by reinvesting them into a Qualified Opportunity Fund within 180 days of the sale. If the QOF investment is held at least 10 years, future appreciation on the QOF investment itself is permanently tax-free. The deferred gain, however, must be recognized no later than December 31, 2026, whether or not the QOF has been sold.13Internal Revenue Service. Opportunity Zones Frequently Asked Questions Members who put earlier gains into QOFs should expect that tax bill on the 2026 return.

Which Forms to File

Form 4797 gets overlooked. Any sale of property used in the business, including equipment, vehicles, and real estate, runs through Form 4797, which sorts out recapture and separates ordinary gain from capital gain before the totals move to the appropriate Schedule D.9Internal Revenue Service. About Form 4797, Sales of Business Property

State Tax Adds to the Bill

Federal rates are only part of the picture. Most states tax capital gains as ordinary income, with rates from zero in states without an income tax to over 13% in the highest-tax states. A handful of states apply reduced rates or offer specific exclusions. Members pay based on their state of residence, and sometimes on the state where the LLC operates, so the combined federal and state rate on a large gain can approach 40% for owners in high-tax jurisdictions. Check your state’s treatment before closing, particularly if you have any flexibility on timing or residency.