1031 into LLC --- question

14 Replies

Will sell with a profit of $200K under wife and husband names.

1) $200K at about $3k tax.. not too bad...  shall better to do 1031 or just pay tax?

2)  How much is the fee for doing 1031?   $1000?

3) The sold property was under wife and husband names ; can 1031 into a new property under LLC owned by wife and husband ? or NO?

@Ethan Smith as far as whether you should or should not do a 1031 that is a question better directed towards your CPA. But if you can save yourself the tax, even if it's a minimal, as long as the cost do not outweigh the benefit it might be worth your time. Generally it will cost you anywhere from $1000-$2000 to engage a QI for your 1031 exchange. Lastly, the title within a 1031 exchange needs to match, so if the relinquished property is in husband and wife's names the replacement would need to mimic that. If it was changed to an LLC before the sale then the replacement property would be OK being in an LLC. Hope this helps.

@Ethan Smith. You can always sell as yourself and buy as yourself and then contribute the property into a new LLC. That's no problem.

But, If the LLC is a disregarded entity (meaning that its only members are you and your wife, you file a joint personal tax return, and the LLC is taxed as a sole proprietor so it doesn't file it's own tax return) then you can sell as you and your wife and purchase as that LLC anyway.

The key is that the tax payer has to be the same for the old property and the new property in a 1031. The tax payer as the iRS knows it is really the tax return that reports the activity of the property - not whose name is on deed. So if you and your wife report the activity of the property on your personal return. And the LLC will not file it's own tax return. Then the activity of the property will still be on you and your wife's tax return. The tax payer will not have changed. That is fine for a 1031.

Whether you should or not???  Well it's not going to be $3K in tax.  It's going to be probably $30K in federal, Another $15K in state, and whatever depreciation recapture there is which will be at 25%.  That's not a small amount.

So, given the amount of tax, the low cost of a 1031 (here's a BP blog we wrote on it - https://www.biggerpockets.com/blog/how-much-does-a-1031-exchange-cost) and the ability to place the new property into a disregarded LLC I'd probably do it if it were me.

Property A -- owned by wife and husband and file joint tax
replacement property B -- new LLC owned by wife and husband
does LLC needs to file partnership tax or no ? If no , the entity is disregarded ? And wife and husband file tax the same way as before?

so 1031 is ok to buy a replacement property under new LLC ?

@Ethan Smith, if the LLC files as a partnership then it is a different tax payer and you cannot sell as yourself and buy as the LLC.

If the LLC is disregarded you can sell as yourself and buy as the LLC. It would still be the same taxpayer.

LLC, owned by wife and husband, is disregarded entity or partnership? Or you can choose.

@Ethan Smith was the property their primary residence?  If so, the 200K will be tax-free from the sale of their home if they have lived there for 2 of the past 5 years.

@Dave Foster is saying you can do the exchange, and transfer ownership into the entity after the exchange.

Still have some concern :  https://www.irs.gov/businesses...

A business entity is a qualified entity if;

  1. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
  2. No person other than one or both spouses would be considered an owner for federal tax purposes; and
  3. The business entity is not treated as a corporation under IRC §310.7701-2.

Note: If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be "qualified joint ventures" (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses.

If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership.

I am in NJ!

@David Smith Buy new property in your wife and your name (1031 exchange) and then 45 days after closing transfer your new property into the name of the LLC. This will serve your tax issue and LLC ownership issue.

Good suggestion by @Al Pat , and another option I've also seen if your accountant is not comfortable with the single tax return would be to actually purchase the property in a disregarded LLC with only one member - either husband or wife as the sole member. Again, this does not change the tax payer for federal treatment but allows the disregarded LLC to take deed to the replacement property as a true disregarded entity.

David Smith

 It will be better for you to do a 1031 exchange, as this will help you to defer the tax completely. There is no fixed fee for doing a 1031 exchange as it range from $750 to $1000 with additional 1031 exchange charges. Yes, if the sold property i.e., the relinquished property, was under wife and husband names then, the new property can also be on the wife and husband name. 

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