1031 exchange guidelines
Property A (investment) is under contract for sale and has no LLC. Everything is under husband and wife's name. Does replacement property have to also be under husband and wife's name for it be considered a 1031? We are looking to do an LLC on replacement property but I think we can't do one because of the 1031 exchange rules, is this correct? If so, how can we protect replacement property since we will have almost 80% equity in new property? Are there any asset protection strategies we can use? Thanks.
#4 All Forums Contributor
- Investor
- Las Vegas, NV
I assume you also have at least 8o% equity in the property you’re selling, since you have to buy more than you’d selling. So the percent of equity should be going down.
Yes, they could get a disregarded LLC, as the IRS only cares the tax payer is the same. BUT, an LLC will almost nothing, if not nothing, to protect equity in a property. Its purpose to protect everything else except that property. Personally I'd suggest you just get an umbrella policy instead. You are 10x more likely to do something personally to get yourself sued than your property is.
As usual, I would throw in a a little promotion for @Dave Foster if you haven’t closed yet. If you search BP you’ll see he’s been handing out expert advice for years. I only suggest this as I assume you haven’t got a QI yet. This is something they should have answered for you instantly, they’re supposed to be the experts. Good luck.
#1 1031 Exchanges Contributor
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#1 1031 Exchanges Contributor
- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
@Robert Caccire, The IRS wants to see the new property reported on the same tax return as the old property was. When you think about it , it does make sense. The IRS does not know who a property is deeded to. They only know what tax return reports the activity of the property.
A husband and wife selling a property that is deeded in their names is probably reported on their joint tax return. If they sell and buy as just the wife or just the husband or as both of them, then the property will still be reported on their joint tax return - no problem at all.
If you're wanting to use an LLC to purchase it will have to be a disregarded entity like @Bill Brandt said. A disregarded entity is an LLC that has only one member and does not file it's own tax return. So all of the activity of the property would still be on the joint return of the husband wife. Again, no problem.
Or, you could always complete the exchange and then at a later date contribute the property into a new LLC. In general contributions into and distributions from an LLC are not taxable events. - again no problem.
The way you own the property shouldn't keep you from doing a 1031 exchange.
Thank you. Need to do a disregarded LLC for protection. Yes we will also be purchasing an umbrella policy since equity is over 80%. Is the protection the same as a regular LLC?
Well.. there is really only "one" type of LLC entity that you can form in your State... These slight 'differences" are really for taxation purposes:
If a single member LLC is formed, for Federal taxation purposes the IRS "disregards" the LLC/entity. Remember, LLC are legal entities formed within a State and are supposed to have their EIN; it just doesn't have a heart beat. So, instead of filing another return as "another" person, the IRS is "disregarding" it as a separate person and keeping the return as a "part of you." You generally just file a SchC (or SchE for rentals) to reflect the LLC's activities. This is taxing the LLC as if it was a sole proprietorship.
So... if the LLC has more than one member, the Federal IRS taxes the LLC/entity as if it was a partnership. Partnerships file a 1065 return. the 1065return spits out form K-1 to each of the members --- basically its like receiving a 1099 or W2 --- which tells each member how to report their portion of the income/losses from the partnership.
To make it more complicated, a LLC can elect to be taxed as a S Corp or a C Corp...
Notice in all these, there is no such thing as a tax return for the LLC. Its uses one of the other business entity's tax system...
Make sense? Good luck.