1031 exchange, then into LLC

12 Replies

I have a property I would like to sell and use the 1031 exchange provision to buy another. My current property is in my personal name. I plan on exchanging into another property (possibly several) in my personal name as well. However, I would eventually like to put it into an LLC in which my brother and I own 50% each. Is there a "seasoning" period I should allow to pass before using a general warrantee deed into the LLC? And does putting it into a multi-member LLC somehow void the 1031 exchange?

thanks.

@Bob Orange there is no seasoning period specifically. What you'll be doing in essence is changing the tax payer by putting it into a multi member LLC. Not a problem in and of itself. But the question could always be asked of your intent in taking title to the new property in your name first.

In order to qualify for a 1031 exchange you must sell property that you acquired with the intent of holding for productive use. And you must buy property with the same intent. It's much more of a bugaboo to change the tax payer right before a sale. The IRS most emphatically does not like this process . because the intent of the entity that you change to is clearly taking title only to resell.

When you do it after an exchange is complete there is not nearly so much angst from the IRS.  Did you buy the the intent of holding but the opportunity to still hold it but also add a partner came up so you changes your intent?  Are you considering yourself to still be holding the property but in a new entity which affords you more liability protection?  Those are the kinds of things you want to be able to say if ever questioned.  But for the most part there's not a problem in completing a 1031 exchange and then quit claiming into a new entity.  

And if you took an intermediate step and first put the property from your name into an LLC that you are the sole member of you would not even be changing the tax payer at all. A single member LLC that does not file a tax return is disregarded by the IRS and you would still be the taxpayer until you officially added your brother as a member of the LLC and began reporting as a partnership.

@Dave Foster. Thanks for the reply. To shed some additional light... the property I own in my name is a NYC coop I bought during the 2008 crash. I lived in it for a few years, then had to move to NJ so I rented it out as an investment. I am approaching the max number of years I am allowed to sublet and the value has doubled so I want to sell it to the tenants and reinvest it in a nice cash flowing property. Since it's a coop, it's not possible to quit claim into an LLC pre-1031 exchange because it's not allowed by the by laws. Anyway, in the past few years my brother and I have created an LLC and have rapidly scaled up the business. I'd like to buy something new in my name using the 1031 exchange, but it would be great if I can then contribute it to our LLC so he can move property he still has in his name as well (so that we are keeping the amounts invested by each of us roughly equal). Whether or not I put the new property in the LLC it would remain for investment purposes, just as the coop was before the 1031 exchange.

@Sanjay Aiyar , well that sounds like it would work out perfectly. You don't want to put it into an LLC prior to the exchange anyway for reasons stated above. And contributions of property post 1031 exchange in exchange for membership interest in an entity (LLC) can be done very easily by your accountant with no tax triggered.

Sounds like it's time to get out of that coop!

On a related note. I read using a general warrantee deed instead of a quit claim should preserve the validity of the original title insurance policy. True?

Also, if I were to deed a property that is in my name into an LLC owned by myself (signed by me and notarized properly), does t matter if I record the deed. I would prefer not to since it would incur a substantial recording fee. And as I understand it, the document is legal once it is signed. I'm not concerned about recording since the Beneficial owner is still me. Any thoughts?

@Dan Cardone , If the property you are selling is in your own name then you will need to take title to at least that much replacement real estate also in your name.

If you and a partner wanted to each purchase part of a larger property that would work.  You would 1031 into a tenant in common interest in your name.  Your partner would purchase the remaining tenant in common interest.  And after the exchange is over you could then work with your accountant to move the property completely into the new entity.

Example - You are selling a property for $200K.  You must take title to at least $200K of property in your name.  You could take title to 50% of a $400K property with a partner taking title to the remaining 50%.

What if we own a property in LLC and exchange it for another property all cash. We want to as a two person partnership quit claim the new property to our personal name so that a bank will give us a cash out refi and not be stuck being an llc which traditional lenders don't like to underwrite. Is this possible .... llc to personal names after the exchange ?

@Nabeel Kurji , That should be fine. Contributions into and distributions out of LLCs are generally not taxable events. So the dissolution of the LLC and putting the properties into your names as TIC should be something your accountant can do with little problem.

Thanks david. Just to confirm - Sellong property in LlC would Mean we would have to buy exchanged replacement property using LLC In order to maintain 1031 treatment ? Once replacement is purchased we are free to quit claim back to personal names for refinancing

@Nabeel Kurji correct. Your accountant will manage it so the capital accounts in the LLC stay correct. But you'll 1031 LLC to LLC and then dissolve the LLC and put the property into TIC.

@Nabeel Kurji , There could be doc stamps.  But there are also a range of exceptions to having to pay doc stamps in FL.  I don't keep up to date on them all but the title co will certainly know.  The code is - 12B-4.014, Florida Administrative Code,