1031 Exchange - Individual name to LLC

[Umesh Chokshi]

Hello ,

Good morning. I am listing my residential investment property in a day or two for sale and want to do 1031 Exchange. I have one technical question about this transition.

In relinquished property, my wife and I are on title. So all the sales proceed will got to escrow account of QI with our individual names and SSN. Now when we buy replacement property, we would be buying in the name of LLC with it's own EIN and would be treated as separate entity for taxation purpose. So if we open LLC and get finance in the name of LLC, we would loose benefits of 1031 Exchange and would be responsible for paying taxes. So how to deal with this situation? Can we get financing in our individual names till we convert it later in to LLC?

Need your help as I am confused.

Thanks,

Umesh Chokshi

[Ryan Thomas]

Umesh,

The only time husband and wife can exchange property held in their individual names and acquire property in an LLC is if they live in a community property state, and unfortunately , NC is not a community property state.

Since you and your wife are the underlying taxpayers, you need to remain the underlying taxpayers on the replacement property, so buying in a MM LLC (partnership for tax purposes) does not work.

Here is a solution:

See if your lender will allow you to take title using two (2) LLCs. If so, create a single member LLC for you and a single member LLC for your wife. Make sure the LLC's are both "disregarded entities" for tax purposes. You can then buy the property as tenants-in-common using the two (2) LLCs.

The reason this works is the underlying taxpayers from the sale are remaining the same on the purchase.

Hope this helps!