How can we 1031 a joint tenants 2-unit into an LLC 3-unit?
My partner and I have owned a 2-unit in SF, as joint tenants, since 6/13 (we were tenants from 1999.) We began renting our second unit 11/15, to a family member, but legit—with actual monthly checks paid to my partner and deposited in his rental account. Only he earns income and files taxes, so he is the only taxpayer that’s ever been associated with the property. We have not yet filed for 2015/2016. (We did not know if we wanted to condo convert the building and if we had, we would have wanted the prop to reflect 100% owner occupancy, thus no filing until we decided which path to pursue.)
We have been interested in a 3-unit in Hawaii since 1/17. We flew out to see it out in January and were ready to make an offer when we got news of a family situation that took precedence. The Hawaii prop went into escrow with another buyer. We became ready to make an offer again after the Hawaii seller's first offer fell out of escrow. The day before that offer was going to be submitted, I was served with a summons for a lawsuit related to comments made on Facebook about an alleged sexual predator in my community. Once again, we were forced to table our offer on the Hawaii prop and, once again, it went into escrow with another buyer. My lawyer has now assured me the case should be dismissed but says, even if it isn’t, I need to proceed with living my life. So, we began looking at other Hawaii props, but then the one we’ve been dancing with for a year was relisted earlier this week—after having fallen out of escrow for the third time since January. So, we are now looking at options for proceeding and trying to guess at how the tax bill may impact our options and choices.
- We'd previously discussed with an accountant the ability to bifurcate SF's gains to utilize both Sec 121 cap gains exemption and a 1031 exchange. But we were told placing the prop into an LLC would eliminate the Sec 121 option for us, so we have not done that.
- I’m seeing the tax bill may take away our Sec 121 eligibility unless we stay in the prop until 6/18 (five years ownership & occupancy), but I’m wondering if occupancy as a renter prior to ownership would qualify us if we sold prior to 6/18? Or, does the occupancy clock only start when ownership begins?
– If it is going away, then there is no reason (that I can think of) not to put the SF prop into an LLC
prior to selling, correct?
- The SF 2-unit is held as joint tenants and we are not married. We want to do a 1031 exchange. We would like to hold the Hawaii prop in an LLC, but we know ownership on both props must be the same.
– Is there a way to do that if my partner has been/will be on the 15/16/17 yet-to-be-filed taxes the
sole tax=payer/entity? We can get married. Or I can quit claim to him. Are there other options?
The urgency around all of this; the Hawaii prop unexpectedly coming back on the market and being told other offers are expected on Saturday, trying to guess at what the tax bill may or may not change, and trying to figure out things like placing the SF prop into an LLC prior to the year's end, all before submitting an offer, never mind ensuring we have access to the funding we'll need for the reverse 1031, is definitely weighing on me. We are not investors with years of experience under our belts. We got very, very lucky four years ago when when the opportunity to purchase our long-time rental apartment presented itself. So, we are doing our best to maximize our opportunity and turn that grand luck into something bigger and better, but there is certainly a bit of terror around knowing there is plenty we do not know and likely even more we do not know we do not know. ;) Any insight, clarity, advice, assistance you can offer, will be greatly appreciated.