sell rental, 1031 exch, purchase current primary home under LLC

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sell rental, 1031 exch, purchase current primary home under LLC

Matthew Belcher
Real Estate Investor · Cookeville, TN · Member since 2014 · 3 posts · 0 votes

Wondering if it is legal for tax/capital gains to do the following:

Sell a current rental property in my portfolio (1031 exchange the profit), structure an LLC to purchase my current primary residence from myself (would be selling my primary home to a business that I now own) utilizing the 1031 exchanged money for the large down-payment; therefor I would be able to pull out capital gains tax free under the IRS primary residence guidelines (250K single 500K married).

I understand that I would no longer have a primary residence but I will be purchasing a new primary residence and renting out the property newly owned by the LLC within a few months after the sale.

Thanks in advance for any information!

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y

The definition of like-kind property to be exchanged into is pretty liberal, but it has to be income producing to income producing.  No primary's.  This has self-dealing and other no-no's written all over it.

I would consult a tax professional, which I am not, but my guess is you're a headin' fer trouble, pilgrim!

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    Not sure exactly what you're saying, or trying to accomplish. Are you saying you'd 1031 your rental property, and the replacement property would be your primary residence that you had just sold your new LLC?

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  • Matthew Belcher
    OP
    Real Estate Investor · Cookeville, TN · Member since 2014 · 3 posts · 0 votes
    10y

    Yes exactly.

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    The definition of like-kind property to be exchanged into is pretty liberal, but it has to be income producing to income producing.  No primary's.  This has self-dealing and other no-no's written all over it.

    I would consult a tax professional, which I am not, but my guess is you're a headin' fer trouble, pilgrim!

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Matthew Belcher, disallowed on several levels.

    1.Related party transaction.

    2.Self dealing - (if LLC is really a pass through entity)

    3. Not like kind for 1031 (selling investment and trying to buy primary).

    If you're wanting to use 1031 $ for your primary there's a better way.  

    1. Stay in your current primary for a while (or sell take the tax free exemption and rent for a while).

    2. Sell an investment property and 1031 into a really nice house that you might like to live in one day but is an investment property for now that qualifies for 1031 treatment.

    3. Use the new property for investment for a while and then change your mind and convert it to a new primary residence.  

    4.  Sell your current primary and take the tax free exemption.

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  • Robert Hetsler
    Qualified Intermediary for 1031 Exchange" · Jacksonville, FL · Member since 2015 · 239 posts · 84 votes
    10y
    David is right on all points
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  • Matthew Belcher
    OP
    Real Estate Investor · Cookeville, TN · Member since 2014 · 3 posts · 0 votes
    10y

    I figured but its always worth getting a second opinion... 

    Thanks Dave, Robert, Steve & Wayne for the responses and information! 

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  • Scott Szurek
    Ann Arbor, MI · Member since 2016 · 40 posts · 2 votes
    10y

    @Dave Foster 

    I had a couple questions regarding your answers on making 1031 x work for a investment property and  primary 

    1. Stay in your current primary for a while (or sell take the tax free exemption and rent for a while).

    How long to do you have to rent?

    2. Sell an investment property and 1031 into a really nice house that you might like to live in one day but is an investment property for now that qualifies for 1031 treatment.

    What qualifies a property for 1031 treatment?

    3. Use the new property for investment for a while and then change your mind and convert it to a new primary residence.

    Does the property have to turn into an investment property immediately?  For ex: could you live there for a bit and then turn it into a investment property for 2 years, then move back and make it your primary?

    4. Sell your current primary and take the tax free exemption. 

    That last statement sounds really nice!

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  • Louis V devas
    Member since 2018 · 1 post · 0 votes
    8y

    How long should we hold it as investment before we convert to primary?

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