1031 and multi-member LLCs

[Ana H.]

I have a rental property in California that is held by an LLC , call it 'California LLC' (my wife and I are the only members) and have filed for taxes in 2017 as a partnership. I am selling this property now and purchasing a new property in Texas through a 1031. The advice I have got is

1. This year (tax year 2018), elect to change to a disregarded entity and then the new Texas property can be in a different LLC (also treated as a disregarded entity).

2. Leave the California LLC as a partnership and buy the new Texas LLC under a new LLC (call it Texas LLC) wholly owned by the California LLC but treated as a disregarded entity. So, in effect, it is the same taxpayer - California LLC.

I am unable to find a preferred approach and don't want to introduce more risk into the 1031 failing.  

Can anyone help shed light here ? Much appreciated 

[Dave Foster]

@Ana H., I don't think #1 is a good move unless you've got a long runway before you sell.  Option 1 potentially changes the tax payer prior to a sale and 1031.  The argument of disregarded entity may hold for you but the optics are still not so good and the CA community property issue is a thorny one that is more legal and state applicable than anything.  If there's question at all on the state level with the Franchise Tax Board I'd steer clear of it.  

Option #2 is probably your best bet. purchase of 100% membership interest of a single asset/single member LLC is a generally accepted way to deal with several 1031 considerations including reverse exchanges and issues of financial guarantor in a purchase/lending situation.

Option #3 would be to simply use the CA LLC to take initial title and then contribute into whatever asset holding entity you choose after the fact. Multiple LLCs becomes a head ache in CA. But this could be the time to create a TX series LLC as an umbrella that does business in CA. Or go the route that @Scott Smith has been talking about - and using a DST for CA purposes. Option #3 accomplishes what I always prefer which is that deed matches as much as possible. There are many scenarios where the taxpayer and deed are not necessarily one and the same. But even if you can answer the question an inexperienced field agent not wanting to listen to good tax law can still ruin your day.