Putting a 1031 exchange property into an LLC (3 years later)

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Putting a 1031 exchange property into an LLC (3 years later)

Ria Lamb
Investor · Machiasport, ME · Member since 2015 · 2 posts · 0 votes

Three years ago, my husband and I did a 1031 tax exchange for a rental property. The property is still a rental property and will continue to be, at least for the forseeable future, but I would like to put the property into an LLC for more liability protections. My attorney referred me to my CPA, my CPA referred me to the attorney for the answer to my question: Can I now, after three years, put the property into an LLC? Are there any tax ramifications?

Second question... if we can put in LLC, the house is currently titled in both my husband and my names but we were thinking of having him sign it over to me and having the LLC in my name only. Possible or no?

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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
5y

Hi @Franky Juwana, 

It is only a problem if you set-up one LLC with two members thus making it a partnership for tax purposes. However, if you currently hold title as individuals and then you each set-up your own single member limited liability company (SMLLC) and disregarded entity with each of you being the single member of one of those entities to acquire your new replacement properties, you could each acquire an undivided interest as tenants-in-common using your new SMLLC/Disregarded entity on day one. As long as the SMLLC is disregarded for tax purposes, the new replacement property would be treated as if each of you acquire the undivided interest in the property directly as individuals.

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

    @Ria Lamb, there's quite a bit to this question that your professionals need to grapple with and should be equipped to grapple with. From the `1031 perspective only the contribution of a previously exchanged into an LLC or other corporate structure does not have to create a taxable event - particularly if you're simply creating a disregarded single member LLC. State domicile law should require some legal input on your other questions.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Ria Lamb

    There are a number of issues here besides your 1031 Exchange related question. The issue from a 1031 Exchange perspective is whether the contribution of the exchange property into an LLC would disqualify your 1031 Exchange.

    You and your husband completed a 1031 Exchange three years ago.  The issue at hand is that you and your husband must have the intent to hold the replacement property for rental, investment or business use in order for it to qualify for tax-deferred exchange treatment.  The majority of advisors recommend that you hold property for either 12, 18 or 24 months in order to prove your intent to hold for investment purposes.  You are well past that, so you should have no problem proving intent to hold for investment. 

    The contribution of your exchange property into an entity at his point in time will not jeopardize your 1031 Exchange transaction since you have such a long holding period (seasoning).  Also, if you and your husband contribute the exchange property into an entity that is considered disregarded for income tax purposes so that it would still be considered as held by you and your husband, then the timing would not matter at all. 

    For example, you could have sold as husband and wife and then bought your exchange property directly in the LLC IF AND ONLY IF the LLC would be considered a disregarded entity for income tax purposes.

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  • Ellen Horton
    Member since 2020 · 1 post · 0 votes
    6y

    Hi @Bill Exeter!

    My husband and I are about to do a 1031 Exchange as well - selling a SFH and leveraging it into a multi-family property. We would love to put the new investment property into an LLC right away.

    What do you mean by the LLC being a disregarded entity for income tax purposes? If both of our names are on the original home, can we create a single-member LLC with only one of our names on it and purchase the multi-family property while still qualifying as a 1031 exchange?

    Thanks for the clarification!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Ellen Horton, Yes you can. If both your names on the deed and you file a joint tax return the the two of you (or more accurately your joint tax return) are really seen as the taxpayer for that property because it is reported on your joint tax return. If you create a single member LLC that chooses to be taxed as a sole proprietor it will not file its own tax return. Instead the IRS "disregards" that LLC and looks to the return that the property is reported on.

    Community property issues in those few states can cause some complications.  but in general using a disregarded entity to purchase your replacement property is fine.

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  • Franky Juwana
    NY · Member since 2016 · 116 posts · 29 votes
    5y
    Originally posted by @Ria Lamb:

    Three years ago, my husband and I did a 1031 tax exchange for a rental property. The property is still a rental property and will continue to be, at least for the forseeable future, but I would like to put the property into an LLC for more liability protections. My attorney referred me to my CPA, my CPA referred me to the attorney for the answer to my question: Can I now, after three years, put the property into an LLC? Are there any tax ramifications?

    Second question... if we can put in LLC, the house is currently titled in both my husband and my names but we were thinking of having him sign it over to me and having the LLC in my name only. Possible or no?

    Hi Ria,

       I know it's few years after your question submitted but I'm also in the same boat, how did you resolve your problem?  My partner and I also bought a house with 1031 Exchange and now in the process to purchase the next property from the previous proceed using 1031Exchange. 

    Every where we asked, it is not possible to convert from our personal name to an LLC (which own by us).


    Thx    

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Franky Juwana, the problem with buying in a multiple member LLC is that it would be a different tax payer than you and your partner. If you and your partner own the current property as tenants in common then that property is reported on your individual tax returns. The new property in a 1031 exchange needs to be reported also on your personal returns. But a multi member LLC files it's own return. So, if you wanted to get your replacement property into an LLC you would have to purchase as tenants in common and then contribute the property into a new multi member LLC and changing the tax payer but changing it after the 1031 is complete.

    The easiest course would be to sell as tic, do the 1031, buy the new property. And then after the fact contribute the property into a new LLC with each tenant being a member.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    5y

    Hi @Franky Juwana, 

    Those folks that you have spoken to are correct. You currently own the property in your individual names. If you sell under your individual names through a 1031 Exchange and acquire your replacement property in a new limited liability company where you and your partner are the members (two member LLC), your 1031 Exchange would not qualify.

    The reason is that the replacement property was acquired by a "different taxpayer."  The two member limited liability company would generally be treated as a partnership for tax purposes. This means that the two of you bought/own a membership interest (partnership interest) in an entity and did not buy/own real estate, so it does not qualify for 1031 Exchange treatment.  

    You could convey/transfer your relinquished property into a new two member LLC today, but you would have to hold it that way long enough to demonstrate that the new owner (entity) intended to hold the property for investment purposes. Depending on what advisor you speak with you will get opinions ranging from 1 to 2 years for holding purposes.

    You could sell as individuals currently, do a 1031 Exchange, buy as individuals, hold long enough to demonstrate intent, and then later convey/transfer the property into the new two member LLC.

    You need to be careful when doing this.  Always review with your tax advisor.  

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  • Franky Juwana
    NY · Member since 2016 · 116 posts · 29 votes
    5y

    Thank you @Bill Exeter and @Dave Foster for the reply, My partner and I literally researched this for few days and thanks for both of your advice, Here's what we're going to do

    We'll buy the 1031 exchange replacement property with our personal name, and after 1-2 years, we'll create a "disregard entity" LLC for each of us and transfer the property deed to the 2 LLC's. Which means we will be protected in litigation situation and for Tax will be just file under each personal tax return.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    5y

    Hi @Franky Juwana, 

    It is only a problem if you set-up one LLC with two members thus making it a partnership for tax purposes. However, if you currently hold title as individuals and then you each set-up your own single member limited liability company (SMLLC) and disregarded entity with each of you being the single member of one of those entities to acquire your new replacement properties, you could each acquire an undivided interest as tenants-in-common using your new SMLLC/Disregarded entity on day one. As long as the SMLLC is disregarded for tax purposes, the new replacement property would be treated as if each of you acquire the undivided interest in the property directly as individuals.

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  • Franky Juwana
    NY · Member since 2016 · 116 posts · 29 votes
    5y
    Originally posted by @Bill Exeter:

    Hi @Franky Juwana, 

    It is only a problem if you set-up one LLC with two members thus making it a partnership for tax purposes. However, if you currently hold title as individuals and then you each set-up your own single member limited liability company (SMLLC) and disregarded entity with each of you being the single member of one of those entities to acquire your new replacement properties, you could each acquire an undivided interest as tenants-in-common using your new SMLLC/Disregarded entity on day one. As long as the SMLLC is disregarded for tax purposes, the new replacement property would be treated as if each of you acquire the undivided interest in the property directly as individuals.

    Awesome!  yes... I wish our intermediary is as helpful as you in answering our questions. 

    One more question, what happens if one of us passed away once we bought the 1031 exchange replacement property with our SMLLC? does it go to the partner or to the person family ? 

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    5y

    Hi @Franky Juwana, 

    It would depend upon how you structure the SMLLC ownership.  There are many ways of planning your estate.  For example, one method would be to have each of your SMLLCs owned by each of your living trusts.  The living trust would then dictate who would inherit the SMLLC and the interest in the property when you pass. It is important to speak with your legal and tax advisors regarding estate planning because there are many ways to plan for your death and you need to make sure that you have it set-up based upon your goals. 

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  • Lu Xia
    Member since 2020 · 1 post · 0 votes
    5y

    I am facing the same issues and glad found these great information here.  In my situation there is one more layer though and hope your experts can advise.  

    The investment property I am selling is held in a living trust of my husband and myself. The trust is a pass through for tax purpose. I have a LLC with myself being the single member. For 1031 exchange, can we sell under the trust and then purchase directly with my LLC? Or do we need to first transfer the property ownership to me alone before selling? Or transfer ownership to the LLC before selling? We generally file tax returns jointly.

    Thanks much.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Lu Xia, As long as the trust and LLC are both disregarded entities then yes you can sell as the trust and buy as the LLC. The reason is that as discussed above the real tax payer for the property is the tax return that reports the activity of the property. If both trust and LLC are disregarded the property is being reported on your joint return Schedule E. Selling as the trust and buying as the LLC does not change that.

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  • Pat Regan
    Member since 2021 · 1 post · 1 vote
    5y

    My wife and I owned a property. We recently sold the property and bought a similar property as a 1031x. That was only 2 months ago. We would like to pass the property to a LLC only in the name of my wife. From the discussion, it would seem that this may go against the terms of the 1031x and that I would need to keep my name on the property too. Is this correct?

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Pat Regan, Perfectly fine. If the LLC is a disregarded entity then it does not file a tax return. Instead all activity of the property is being reported on your and your wife's joint tax return. That really makes that tax return the tax payer. It will not matter if it is one or both of you on the LLC as long as the property continues to be reported on your personal tax return.

    One thing to watch out for - The IRS has said that LLCs with husband and wife in non-community property states must be treated as partnerships and are not disregarded entities. This is an example where only having one of you on the LLC would be preferable. Since both of you as members of the LLC in a non-community property state would actually be a different taxpayer since it would file it's own return.

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  • Alex Hill
    Member since 2022 · 1 post · 0 votes
    4y

    This is great to find this discussion since I too am having trouble getting answers from QI.

    If I understand the discussion, my wife and I can sell our relinquished property, create an LLC in our names and purchase replacement property if we live in a community property state.

    However, if we don't (as in our own South Carolina) any multi-member LLC would be seen as a partnership and a separate taxable entity (disqualifying 1031 status).

    This seems to leave us with buying as ourselves and putting into separate LLC's after 1 to 2 years which not too appealing (mostly due to timing).

    Is there another option we might consider that either allows going to LLC sooner or immediately?

    (i.e. it seems that purchasing replacement property as a SMLLC is not feasible in SC from a 1031 standpoint?)

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    4y

    @Alex Hill, You summed it up perfectly.  The two most common alternatives that our clients will use are

    1. To sell as the married couple and buy with a single member llc of only one of them (This avoids the LLC being seen as a partnership but also doesn't change the tax payer since the property will still be reported on your joint tax return)

    2. Sell as the husband and wife and buy as two single member LLCs (one for each).  This too avoids the partnership issue and keeps the activity of the property on your personal tax return since both of the LLCs would be disregarded entities.

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  • Varun Parakh
    Investor · Pleasanton, CA · Member since 2017 · 5 posts · 1 vote
    3y

    I have a scenario and wanted to check if this qualifies as 1031 exchange. I have a property (Condo) which I am planning to sell and do a 1031 exchange. Can I partner with someone else and go 50% each on a new property (with my share of 50% equivalent to original Condo I am selling) and do a 1031 exchange?

    ORIGINAL HOME: Title on Owner1

    New Home: Joint deed on name of Owner1 and Owner2 each owning 50%.

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


    @Varun Parakh    , Yes, that would work as long as you actually take title to 50% of the new real estate as a tenant in common with owner 2. You only need purchase at least much as your net sale to completely defer all tax. You or anyone else can take title to any remaining percentage.

    You also need to remember that you must use all of your proceeds in the purchase. Depending on the lending situation you may need to make a larger down payment to satisfy that part of the rule.

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  • D Giambo
    Member since 2023 · 3 posts · 1 vote
    3y
    I have read all of the posts and replies in this chain. Thank you for your helpful answers. Our own lawyer who led the 1031 exchange was very stingy with information.
    My husband and I did our very first reverse 1031 exchange, closing it out 6 months ago. (The time frame for this was extended due to a natural disaster extension provided by the IRS. The closing of the property to start the reverse exchange actually happened approximately 1 year and 2 months ago.) We would like to move the property into an LLC for liability reasons. If I understand correctly, and if the IRS regulations have not changed over the time of this conversation (since it started 7 years ago), we could (and please let me know if I am on the right track):

    1. Hold the property as it is in our two names for another 6 months to 1 1/2 years (totalling 1-2 years after the conclusion of the reverse 1031 exchange) to meet the IRS required intent to hold it for investment purposes and THEN move it into an LLC. (Would this time frame of 1-2 years start at the time we purchased the property and started the reverse 1031 exchange or from when the 1031 exchange concluded, and it was moved from the required LLC during the exchange into our names?)
    2. Move the property into a single member LLC now. (And if so, would we have to change the title into only one of our names?) This way, the single member LLC would be part of our joint tax return.
    3. Move the property into two single member LLCs with each of us owning one of the LLCs. (This seems like a more complicated option.) This way, it would be disregarded by the IRS, since the two LLCs would be part of our joint tax return.

    If we were to move the property into an LLC that we both own, it would be a partnership and would be seen as a different owner, since we'd have to file a separate tax return.

    Does that sound about right? Please let me know if my understanding is incorrect. And thank you so much!
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  • D Giambo
    Member since 2023 · 3 posts · 1 vote
    3y
    Oh, sorry - one more point. The property is in NY, and we live in FL. This was important for some of the other conversations. I don't know what a non-community state is, but that was part of the discussion.
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @D Giambo, Contributions into an LLC are not generally considered taxable events. If it is a disregarded entity LLC you're not even changing the tax payer and could do it immediately. For you to have waited a year or two is probably fine. Your accountant just needs to feel comfortable with it.

    what concerns me more is what you meant by "our own lawyer". If by this you mean your attorney who does other things for you as well, then that attorney is actually prohibited by law from doing your 1031. The 1031 exchange must be performed by an unrelated 3rd party whose only role can be performing the 1031. If your attorney didn't know that they might not have been able to answer your LLC question.

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  • D Giambo
    Member since 2023 · 3 posts · 1 vote
    3y

    Thank you for your caution and care in reading my post. When I stated "our own lawyer," I was not clear. I was referring to the attorney that is employed by the 1031 exchange company that handled the exchange. He certainly was not our lawyer in any sense other than that he handled the exchange through the company he works for. Thank you.

    1Reply
  • Chris M.
    Member since 2023 · 1 post · 0 votes
    3y

    Hello, I am hoping for some good advise. Looking at all the previous correspondences I think I'm in the right place.

    Here is our situation: husband and I sold a property we owned under both of our names through a 1031 and purchased the replacement property under both our names. We then formed an llc a month later and registered it with the irs as a multi member partnership with an ein#. Then transfered the property deed to that llc withthat ein# at the direction of our cpa. After the fact, I was made aware of a recommended waitng period unless the llc is a disregarded entity that you can fom right away. So our cpa advised to file our current llc as a single member llc disregarded entity with the same ein# under 1 of our names. Will this pose any issues with the deed or the 1031? Please help!! TIA!

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

    @Chris M., It's highly doubtful that this will hurt you as long as your CPA continues consistently with the reporting path they recommended.  It should be fairly easy to demonstrate if asked that this was not done as part of a tax avoidance strategy.  And was simply a liability avoidance/consistent accounting practice issue.

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