1031 exchange between 2 LLCs I manage.

1031 Exchanges
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1031 exchange between 2 LLCs I manage.

Harry Perrette
Member since 2023 · 2 posts · 0 votes

I searched the forms but didn't find the info that I am searching for.

We are selling a piece of property for 850,000. We currently own a building that has a loan of 325,000, with a recent appraisal of 400,000. Both of these properties are held in their own LLC. Once the property closes, can company A (owns the property) sell the property to company B (owns the building) and use a 1031 exchange to deffer some of the capital gains taxes? Myself and my father are both managers on both properties and LLCs. We are closing in 2 weeks.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y

@Harry Perrette, Nope.  Even though the LLCs are different.  They have the same ownership.  So the IRS would look right through that and say that you were trying to buy from yourself.  You can 1031 into something else.  But not between LLCs you own.

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  • Steve WoltermanBusiness Member
    Attorney / Qualified Intermediary · Cincinnati, OH · Member since 2022 · 49 posts · 26 votes
    3y

    If I understand correctly, Company A is selling property for $850k to a 3rd party in two weeks.  The question is can Company B sell a building for approximately $400k to Company A, when you and your father are both members and managers of Company A and Company B.  Unless there are additional owners of Company A and B, the answer is likely no.  It sounds like you and your father are the two members of both Company A and Company B.  The Internal Revenue Code has attribution rules that attribute ownership of parent/child to each other as well as partnerships to each other when there is common ownership of 50% or more in each.  i.e., Company A and Company B, if owned by you and your father only, are considered related parties with regard to a 1031 exchange.  Generally speaking, you cannot acquire replacement property from a related party in a 1031 exchange.  If it's going to be considered, factors such as whether Company B is going to do its own exchange and an analysis of the tax basis in each property are critical.  Only if you can prove that there is no basis shifting to avoid tax should one even consider acquiring replacement property from a related party in my opinion.  Another thing I like to point out to clients is that you have to self report on Form 8824 if a 1031 exchange involves a related party.  I think  it is safe to say that one can expect greater scrutiny from the IRS when the related party box is checked.  

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  • Harry Perrette
    OP
    Member since 2023 · 2 posts · 0 votes
    3y

    So this is something I should have been working on over the last 11.5 months and not in these last 2 weeks. There is so little available right now to purchase, it might just be better to take this $100,000 bath. At least the rate is low.

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  • Steve WoltermanBusiness Member
    Attorney / Qualified Intermediary · Cincinnati, OH · Member since 2022 · 49 posts · 26 votes
    3y

    I know it's a tough market to find property but there are other options. If the tax deferral is important, you can always roll the funds into a DST investment for a period of time (usually around 6yrs) and exchange back into bricks and mortar and the end of the investment. I can further explain DST investments if you are unfamiliar. There is also a favorable rule that allows a taxpayer who sells relinquished property in the later half of the year elect Sect. 453 Installment Sales treatment if the taxpayer is unable to acquire enough replacement property or fails in the exchange in all-together. This means that when you sell a property and do a 1031, and the 180 day period of the exchange straddles the tax year, i.e., the 180th day is in 2024, and you end up owing tax on the sale, you can elect to report and pay the gain in 2025 when you file your 2024 return. You would still likely pay a year of interest on the amount, but the extra year is often preferrable to taxpayers. You should make an earnest attempt to complete the exchange, and I see many clients are still finding replacement properties during their identification periods. The 453 installment sale treatment can be a compelling reason to attempt the exchange.

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    I don’t think you’d “get away with it” but luckily it probably doesn’t matter. First, you’re creating a tax liability for the seller of the second property, you’re inheriting a very low tax basis for for buyer of property b. And most importantly, any excess is considered income, not a pro-rated portion. So in your example you’d owe taxes on up to $450k in gains anyway. So unless you have zero basis in the sold property it’s a waste of time. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Harry Perrette, Nope.  Even though the LLCs are different.  They have the same ownership.  So the IRS would look right through that and say that you were trying to buy from yourself.  You can 1031 into something else.  But not between LLCs you own.

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