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

2 Replies

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?

@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.

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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