1031 Exchange from Personal to LLC

[James Hentz]

Hi,

My wife and I had a rental property in our names and after making capital gains have decided to sell the property and perform a 1031-Exchange. We have identified a small apartment building as a like-kind asset and currently have it under contract. Given the increased scale of this new asset we are interested in creating an LLC to limit our liability. I am unable to get a clear answer if I can do the like-kind exchange from our name to an LLC where we are the entity owners. Any advice would be greatly appreciated.

Thanks in advance,

James

[Dave Foster]

@James Hentz, It can get murky but the key is that the tax payer for the old property has to be the taxpayer for the new property.  But who is the taxpayer???  It's not necessarily who is on the deed.  The taxpayer for a property is the tax return on which the property is reported.  If you and your wife file a joint return then that return is the taxpayer for that property.

Which means that your personal return also has to be the tax payer for the new property. If you form an LLC that has a single member and elects to be taxed as a sole proprietor and does not file it's own tax return then even if the property is deeded to that LLC it does not change the tax payer. All activity of the property is reported on your schedule E as always. So technically you could make this kind of election.

However, if the LLC has more than one member or is still a single member but elects to be taxed as a partnership then that LLC will file it's own tax return. You will have a K1 partnership return to report on your tax return. But the LLC is now the taxpayer for the property. So you have changed tax payers. And that is not allowed.

I would always recommend that you make the deeds match as closely as possible as that avoids questions or an argument with an inexperienced field agent. If you want to go that route then you could simply sell as yourselves, do the 1031 and buy as yourselves and then after the fact quit claim it into the new LLC. That works as well.

I've got a video training on that subject I can forward to you.