1031 Entity Question

3 Replies

Hello,

My husband and I are selling a rental property that is currently held in our name. The bank won't let us move it into an LLC without a full refinance. We had hoped to use the proceeds of the sale in a 1031 Exchange but definitely want the new property to be in an LLC. I realize we need to put it into a 'like entity' and wondering if there's a work-around for this. Someone mentioned the possibility of a Quit Claim once we sold he property. Wondering if anyone has experience with this.

@Tamara Glass , The taxpayer for the old property has to be the tax payer for the new property.  And the IRS does not like entity changes before a sale and 1031.  It seems like your bank doesn't either so that's OK.  In order to do a safer 1031 you were going to need to sell the property in your name and buy in your name.  

However, here's where you have some options.

1. As @Jay Shapiro noted you could complete your 1031 and then contribute the property into a new LLC and change deed. This doesn't affect your 1031. BUT...It absolutely is the banks business. It does affect the mortgage and it can trigger a due on sale clause. So you would always want their permission to do so after your purchase. It sounds like your bank is not against an LLC so this should be something you can get from them pretty easily.

2. If the bank will not let you change deed to the LLC after you complete your purchase first try another bank. Second you could create a single member disregarded LLC (doesn't file it's own tax return and you are the only members). That LLC is "disregarded" by the IRS and they look to you and your husband still as the tax payer for the property since all activity of the property is reported on your Schedule E. If the LLC is truly disregarded then you could sell as yourself and buy as the LLC and technically you are not changing the taxpayer. And if you've documented your bank's desire to see this in place before then you've strengthened your case even more.

We and most QIs don't prefer this because its always best to match the deeds as closely as possible since the first person looking at you return in an audit is a field agent of very limited experience. And it is ever so much easier to avoid questions with those folks rather than to try and explain them.

So you've got a couple of options