Impact of Estate Planning Trusts on 1031 Potential

1031 Exchanges
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Impact of Estate Planning Trusts on 1031 Potential

Rebecca Six
Member since 2019 · 11 posts · 10 votes

My husband and I have rental properties titled in a single member LLC owned by my husband. These properties were exchange properties from a 1031 transaction several years ago. For estate planning purposes, we want to change the title to a revocable trust where my husband and I are the trustees. will this have a negative tax implication for 1031 purposes if we want to sell these and purchase properties prior to my husband's passing?

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  • Dylan Johnson
    Qualified Intermediary for 1031 Exchanges · Greater Detroit, MI · Member since 2023 · 14 posts · 7 votes
    2y

    Hi Rebecca, 

    Couple things I want to point out here. First I am assuming by several years it has been more than 2 tax reporting years since the 1031 exchange. This would allow you to make material changes to the deed without risking qualified use being in question from the original exchange. Material changes, being something similar to your proposed. LLC -> Revocable Trust.

    The more important factor I would look into is how soon from the change do you foresee any properties being sold? The reason I bring this up is that changing from a single member LLC to a trust with both you and your Husband could potentially reset your 2 year holding period requirements if you wish to 1031 exchange again in the future.

    I would definitely recommend reviewing this with your CPA to get a good idea of any tax implications outside of 1031 exchange know how. 

    If you are in a community property state, there may be more of a basis to stand on that this would NOT reset your 2 year holding requirements. Community property states view a Husband/Wife as one unit, at least for 1031 purposes. 

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  • Rebecca Six
    OP
    Member since 2019 · 11 posts · 10 votes
    2y

    Thanks for your response. It has been several years since the units were purchased. We don't anticipate selling them anytime soon so the 2 years would not be restrictive.

    We don't live in a community property state.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Rebecca Six, You can dissolve that LLC and move the properties into a trust anytime you want. Work with your accountant to do so just in case there's any issues remaining in that LLC. This would be a good idea to do anyway if your LLC is not filing it's own tax return. As that is a disconnect between how the LLC should be taxed since you are not in a community property state.

    A revocable trust generally does not file it's own tax return.  All the activity of the property is reported on your personal tax return.  So the IRS calls this a "disregarded entity" and sees you as the real tax payer.  So when/if you later sell then you can sell as the trust and buy as the trust in your 1031.  Or you could sell as the trust and buy as yourselves and still be fine with your 1031.  This is key if you're trying to get financing since lenders many times will not give the best terms when lending to a trust.

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  • Art Webb
    Member since 2019 · 50 posts · 7 votes
    2y

    I understand that you could also keep your LLC and have it placed into your revocable trust without dissolving it. Allows more privacy and another layer of liability protection. I saw several articles via Google search by lawyers explaining this option.

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