How to move a 1031 Exchange Property ownership to an LLC

Question

I recently sold an investment property and buying a restaurant building in exchange through 1031 . The relinquishing investment property was on my name which I bought many years ago. Now that the investment has grown into a considerable amount of money, I would like to put it into an LLC. So the question is, how do I transfer a 1031 exchange replacement property from my name into an LLC?

Dave Foster · Answer

@Prithvi Sri, it depends on what type of LLC you want it to be in.

1. An LLC that only has you as a member and chooses to be taxed as a sole proprietor does not file it's own tax return.  All activity of the property is still reported on your personal return even though the deed in in the name of the LLC.  This is what is called a "disregarded entity" and is fine for 1031 because the "tax payer" for the property is actually the tax return on which the activity of the property is reported on.  There's nothing much you need do here except quitclaim the property to your LLC or take title as the LLC.  But keeping the reporting right where it is.

2. An LLC with multiple members or one that has elected to be taxed as a partnership is what is called a "regarded entity".  It will file it's own tax return.  It is a different tax payer than you.  So you cannot sell as yourself and buy as a regarded entity in a 1031.  You must sell as yourself, buy as yourself, and then later contribute the property into the new LLC.  you'll want your accountant to assist so the LLC capital accounts are reflected correctly.  And they will help you determine when the feel enough time has settled on the 1031 and you can now contribute into the LLC>

Steve Morris · Answer

In OR, we just do a B&S deed (which means warr deed for $0 consideration).

As noted, the LLC, for tax purposes is just a pass-thru to members (depending on the operating agreement) and the intent of an LLC is to limit your liability to the property itself.

Dave Foster · Answer

@Prithvi Sri, Sure,  An LLC can be set up one of two ways - It is either a "disregarded entity" or a "regarded entity" for tax purposes.  Which means that the IRS "disregards" the entity as an entity and looks at the member of the LLC as the true taxpayer.  This is scenario 1.  The LLC is "disregarded".  It doesn't file a tax return so the member of the LLC is the taxpayer.  So the member could sell and then buy as the LLC.  or Vice Versa.  The IRS "disregards" the LLC.  And the activity of the property stays reported on the same tax return.

In scenario 2 the LLC is "regarded".  If has more than one member or elects to file taxes as a partnership.  But the IRS "regards" it as a tax paying entity.  It files a tax return.  It can do 1031 exchanges with property it owns.  But the members cannot do 1031 exchanges personally with property owned by the "regarded" LLC.  Because it is seen as a separate tax paying entity you cannot sell as yourself and buy as a "regarded" LLC in a 1031.  That is changing the tax payer because the old property was reported on your personal tax return.  And the new property will be reported on the "regarded" LLC's tax return.

However, contributions in and distributions out of a "regarded" LLC do not have to be taxable events.  So you could sell as yourself and buy as yourself, and then after a time contribute the property into a regarded LLC without a taxable event.  For this you want your accountants help to set up the schedules correctly.

If the LLC you want to contribute the property into is a "disregarded" entity then all you need do is quitclaim the deed into that LLC.  Nothing changes in the tax reporting.

This should be information that your QI is relaying to you.

How to move a 1031 Exchange Property ownership to an LLC

Most Popular Reply