Have a property in NY with substantial cap gains that I am looking to 1031 and it is in my name. I would like to change title to LLC instead of my name and was interested in knowing the consequences of doing this before or after a 1031?
Prior to a 1031, does transfer of title to LLC trigger a tax liability or is it disregarded since it''s a single member LLC?
For the sake of all you 1031 nerds out there who haven't closed your accounts this is an interesting question.
If the LLC is truly disregarded (meaning it does not file a tax return and is taxed as a sole proprietor) then the LLC and account closed are considered to be one and the same for 1031 purposes. the statue reads that the "taxpayer" must be the same on the relinquished and replacement properties. The taxpayer is the tax return that the activity of the property is filed on. So in the case of a disregarded entity the individual and the LLC are the same. So it would be OK to transfer to that LLC and then sell.
However here's some potential issues
1. LLC financing in an unseasoned LLC is much more difficult. So keeping the property in their name might be wiser because then they can get the financing in their name personally and then contribute into the LLC when their lender lets them.
2. Whether it's legal or not sometimes doesn't matter to a field agent auditing your return. They're human (or subhuman as some would say) and this issue might be something that requires a deeper level of explanation. The field agent in an audit may perceive that the tax payer has changed because title has changed and so the issue of holding and intent come into play. So once again it may be prudent to sell as themselves and then buy as themselves and then contribute the property into the LLC. I'd rather avoid questions than be able to answer them.
So long @?account closed. We hardly knew ya!
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