Putting a 1031 exchange property into an LLC (3 years later)
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votesHi @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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41 Replies
- Member since 2023 · 10 posts · 1 vote3y
I have a similar question to what others posted about, but another slightly different twist.
My wife and I both jointly own a renovation business, and for this purpose, we can refer to it as our Renovations, LLC. We are wrapping up a flip with hopes to sell in December. I have an offmarket tri-plex soon to be under contract and was hoping to do a reverse 1031 exchange with it.
I have a completely separate entity that my wife and I own for our "passive" investments. Let's call this our Properties, LLC.
If I understand correctly, I would have to do the 1031 Exchange into the "Renovations, LLC" initially. At what point would I then be able to transfer this property from the Renovations, LLC into the Properties, LLC? Would that be considered a taxable event? My wife and I are joint owners of both businesses. Thanks!
- 3yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Dustin Summers, What the IRS is going to be looking for is the reason why you switch from one LLC to another. Their assumption is always that you are trying to avoid taxes in some way. It's not wrong to do so. Your accountant just needs to be comfortable with process and time. Some say you can do that with LLCs immediately (since you and your wife are the members of both anyway). Some would say season over a year.
More of an issue for you is that you mentioned that this is a flip property you are selling. In order to qualify for a 1031 you must have purchased that property intending to hold for productive use. And something is now making you change that intent. You'll want to have a good handle of the "why" of this question. That is where you would be questioned first because flips where your intent was primarily to resell do not qualify for 1031s.
The 1031 Investor5140 Reviews @Dave Foster and @Bill Exeter I've researched endlessly on this topic, including reviewing IRS procedures and rulings, and speaking with 1031 intermediaries, and can never seem to come to a clear picture of how to handle my situation until I came across this page. This is very helpful! There are a couple nuances with my situation that I wanted to run by y'all and get your feedback if you don't mind.
I owned a 100% of a property that I sold last year and 1031d into 3 properties (using all proceeds). My question is about one of these three properties in particular. I purchased a 50% undivided interest in the property and my brother purchased the other 50% undivided interest, both as Tenants in Common. In addition to cash, we financed the property with a loan. The property currently has two rental houses on it that we have rented out. In the next couple months, we are demolishing the rental houses and building metal buildings/flex space with many units that we will lease out to many tenants.We will be getting financing through a bank to build these buildings. How can I structure this as to avoid a partnership and maintain my 1031? When we get financing for the buildings, we were planning to refinance the note on the property and roll into the loan with the buildings. Is this okay? If so, I figured there would be two ways to do this:
1) We each put our 50% undivided interest into separate LLCs, and then each of those LLCs will hold 50% of another LLC, which will hold the note, all expenses, profits, etc., and which will distribute 50% profits to each of the underlying LLCs that own it.
2) We each put our 50% undivided interest into separate LLCs, then create another LLC, of which we are both members. This LLC will hold the bank note, and handle all expenses/construction, and profit disbursement, etc, but our other LLCs (which holds title to the property) will not have any ownership in it. My only question here is whether or not our lender would allow the loan to be in this separate LLC when our separate LLCs (with our 50%) don't have any ownership in it. I'm guessing the current note could be paid off and each of our 50% interest/LLCs could be pledged as collateral/recourse for the single LLC which we run the rental expenses/profits through?
Please let me know if I need to clarify anything but I'd appreciate your help!- 2yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Jeff B., this really isn't going to be a QI question since you are not relinquishing title to the property. However, from a strategic operational point of view.
1. The first thing I'd say is that you already have a partnership. And you might be best served to strengthen and formalize that situation as quickly as you can. Two people own a piece of property and are wanting to do something with it - That's a partnership no matter how you slice it.
2. The more complex you make your LLC situation (particularly with unseasoned proxy LLCs) the less appealing they will be to a lender. A lender wants recourse and a guarantor that has assets. I doubt that any lender would lend to an unseasoned LLC without the guarantee of the member (or the member of the member).
3. Unless an LLC has assets to back it I highly doubt a lender would make a loan to it.
In the interest of keeping it simple...
1. Each of you could contribute your 50% tenancy into a new LLC. Contributions into and disctibutions from an LLC are generally not taxable events. this puts the property under one ownership of one LLC. And you can then use the foundational and operational documents of this LLC to guide your project.
2. You could continue with two tenants owning the property ( it doesn't matter if it's you or single member LLCs formed by each of you for most purposes). The lender will be asked to lend with the property as security and both LLCs or individuals guaranteeing the loan. In this event you'll still want to formalize your arrangement with either
. a. A strong managment agreement between tenants.
. b. Or a 3rd LLC that each of you are 50% members of. This LLC will not own the property. But it will manage the property and development.
The 1031 Investor5140 Reviews - Member since 2023 · 1 post · 0 votes2y
Hello, I'm looking for some advice.
My wife inherited a rental home which she recently sold in a 1031 exchange for 3 rental properties. We would like to put each of these properties into individual "disregarded LLC's" for the liability protection but we don't want to trigger a capital gains tax situation. We currently file taxes jointly. I have read the comments about a disregarded LLC which this would be. My question is: even though it's a disregarded LLC should it only be in my wife's name or can we both be on it? - 2yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Joe Avellar, An LLC with husband and wife as member can only be considered a disregarded entity if they are in a community property state. Otherwise the husband/wife LLC is to be filed as a partnership. And this would require a tax return by the LLC.
If would be fine to contribute the property into a partnership LLC if you live in a non-community property state. But if you want to maintain the disregarded nature and live in a non-community property state your wife will have to be the only member.
The 1031 Investor5140 Reviews - Member since 2018 · 6 posts · 0 votes2y
Hello, this is all helpful information. We are also in the same position. We sold a property that was in the name of both of us( my wife and my name). Our original goal was to transfer it into an LLC that was owned by both of us but were told that wouldnt qualify. If we kept it in our name for a year, does anyone know if we will have to pay transfer taxes when we transfer it to the LLC in both our names? Or is it best to create two SMLLCs and then do the transfer later. For some context, we have a revocable trust as well as a holding company that owns all those LLCs.
- Member since 2024 · 4 posts · 2 votes2y
This thread is super helpful. Hoping someone is up for the intellectual challenge of this situation...
I'd like to sell my 2 unit residential duplex (in my name) and 1031 into a property that's a bowling alley/bar/3BR apartment. Given the apartment and long term rental (bowling alley could be leased to an LLC if needed), is that a like kind exchange?
With the liability of the bowling alley and bar I'd want an LLC of course. But if I'm 1031ing from my own name, would I then wait the 12-24 months before LLC? Seems risky?
Any related advice or blind spot ?
Thanks,
Husband of wife who said yes to a bowling alley.
- Member since 2018 · 6 posts · 0 votes2y
Hello, that is what I was told. I just had the same situation happen to us, we had a property in our name and was trying to 1031 it into an LLC and was told we can't do that right away. We have to wait at least a year
- Member since 2024 · 5 posts · 2 votes2y
Our family trust did a 1031 exchange 5 years ago, one of the assets we acquired was a parcel. We want to develop the lot now and build a short term rental, preferably owned by an LLC. I read the answers here and don't see anything problematic if we simply transfer the lot to the new LLC, and sla as the Trust is the only owner of the LLC. But what if we want to sell interests in the LLC after its formed to help subsidize the build? Is that going to be considered partially redeeming the exchanged property? If so, any suggestions on what alternatives we should consider? We have invested a considerable amount already into the to-be-built plans, architects, engineers, etc. Suggestions welcomed.
This is such an informative thread. I'm in a similar situation. My wife and I sold a condo that we jointly owned, and purchased two separate 1031 exchange properties in our names.
We want to put one of the two in an LLC. The property is located in Wisconsin. We are located in Illinois, and we formed a 2 member LLC in Delaware.
If we deed the property into the LLC, could the IRS consider this a taxable event?
- 2yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Tom Brown, whether or not that LLC is considered a disregarded entity because of community property issues, contributions of a property into an LLC in exchange for membership interest is not a taxable event. At this point you should be fine contributing the property into a new LLC without tax consequences.
The 1031 Investor5140 Reviews Thanks for the unmatched expertise and insights on this thread. I think I have a little bit of a "situation" and my CPA is scrambling a bit as well as possibly putting me in a pickle.
- I sold a long standing investment property I had owned jointly since 2009 (was primary residence before 2009) with my wife (now ex since 2022) as part of our divorce settlement in April 2023. and put my portion of the proceeds (half of the proceeds - other half went to my ex) in a qualified 1031 intermediary at closing.
- I took some advantage of a potential disaster tax relief for San Diego County - which is coming into question in the designation of the replacement property since it was done after 45 day window per the relief, so would like an expert opinion if 1031 deadlines were altered by that relief for Section 6 in Feb 2023 bulletin or not. My understanding through some forums and my CPA was was that I had till Oct 16, 2023 for both identifying/designating and closing the replacement property.
- Assuming I was good pertaining to the deadline, I designated and closed on buying the replacement property in Sep 2023 with funding from the 1031 exchange as well as additional cash as a sole individual buyer. The cost of the new property covered the 1031 requirement of the value being equal or greater than the sale price of the joint property that was attributable to me (50%).
- After closing as an individual buyer and completing all 1031 requirements (IMHO), I formed an LLC through my lawyer for the purpose of transferring the newly acquired property in there before I rented it out. My CPA advised to designate the LLC as an S-corp for tax advantages (and I am scratching my head on what those were, because I can't recall now) and he helped me do that.. I rented out the property in mid-Oct 2023
- Now I am filing my personal and the S-corp return (had a to file an extension given this situation) with passthrough of passive loss into my personal tax return and my CPA is saying I negated the 1031 requirements by converting it into S-corp, which he recommended being in the loop and advising on every action above. And to say that I am beyond mad would be an understatement.
Seeking your expert opinion or answering any further questions to help me navigate this to the best possible outcome.
Thanks
- Member since 2021 · 4 posts · 1 vote2y
Hello –
I have read the posts in this chain and looking for confirmation of understanding/ advice.
My parents completed a 1031 exchange over 2 years in their own names – they file a joint tax return. We'd like to transfer their interests to an LLC – however, we do not with to be treated as a partnership for federal tax purposes. From the posts, it seems that if my parents transfer the property to a LLC in which each owns a 50% interest, the default federal tax classification would be a partnership if we do not live in a community property state and the property is not located in a community property state? We live, and the property is located, in NJ, which based on my research is not a community property state. Would appreciate some advice on this. Our CPA told us if we transferred to NJ LLC with both of my parents as 50/50 owners, they can treat the LLC as a single member for federal tax purposes and continue to file on Schedule E because they file a joint return, but this seems to be inconsistent with what I've read in this chain.
If we want to transfer to an LLC and continue reporting on Schedule E on their joint tax return, can I simply set up the LLC with one of my parents as the member and have each parent deed their interest to the LLC that will be owned by one parent? I think there is a deemed sale from one parent to another but since they are husband and wife filing joint return, I don't think there are tax ramifications but would appreciate thoughts/ advice here. We'd prefer to not deed their interests to 2 separate SMLLCs as this creates complexities with having to maintain multiple bank accounts, etc.
Note that at some point in the future we'd like to complete a 1031 but in the name of LLC instead of their names.
Thanks in advance for advice/ input.
Jackie
- Member since 2023 · 10 posts · 1 vote2y
Quote from @Jackie Riley:
Hello –
I have read the posts in this chain and looking for confirmation of understanding/ advice.
My parents completed a 1031 exchange over 2 years in their own names – they file a joint tax return. We'd like to transfer their interests to an LLC – however, we do not with to be treated as a partnership for federal tax purposes. From the posts, it seems that if my parents transfer the property to a LLC in which each owns a 50% interest, the default federal tax classification would be a partnership if we do not live in a community property state and the property is not located in a community property state? We live, and the property is located, in NJ, which based on my research is not a community property state. Would appreciate some advice on this. Our CPA told us if we transferred to NJ LLC with both of my parents as 50/50 owners, they can treat the LLC as a single member for federal tax purposes and continue to file on Schedule E because they file a joint return, but this seems to be inconsistent with what I've read in this chain.
If we want to transfer to an LLC and continue reporting on Schedule E on their joint tax return, can I simply set up the LLC with one of my parents as the member and have each parent deed their interest to the LLC that will be owned by one parent? I think there is a deemed sale from one parent to another but since they are husband and wife filing joint return, I don't think there are tax ramifications but would appreciate thoughts/ advice here. We'd prefer to not deed their interests to 2 separate SMLLCs as this creates complexities with having to maintain multiple bank accounts, etc.
Note that at some point in the future we'd like to complete a 1031 but in the name of LLC instead of their names.
Thanks in advance for advice/ input.
Jackie
Hey Jackie... are you looking to transfer to an LLC for asset protection? The issue with that is I'm pretty sure that's considered a "taxable" event as you're transferring an asset from your name to a business... I ran into this scenario earlier in the year as I did a 1031 Exchange of a home in my name, and by the 1031 Definition, the new properties had to STAY in my name.
Also, if a lender finds out that you did a "Quit Claim Deed" and transferred the asset into a business, they can call the "Due On Sale" clause which means you owe back the entire amount of the mortgage within a certain amount of time.
Again, if this is primarily for asset protection, what I ended up doing is starting up a Land Trust for each property I purchased. You can put these into a Revocable Living Trust, which by Federal Law, means that the lender cannot trigger the "Due on Sale" clause as long as your parents are the beneficiaries of the Trust.
I would look into going that route. This also means that, down the road, you can take the asset out of the Trust and do a 1031 Exchange, but it still provides you with that layer of protection that an LLC would provide.
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