Foreign investor - Shall I 1031 or LLC for a $50K profit

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Foreign investor - Shall I 1031 or LLC for a $50K profit

Henry W.
Investor · Los Angeles, CA · Member since 2011 · 17 posts · 1 vote

I am a foreign investor that bought a couple of lots in Los Angeles tax sale in a structure that was meant for development and long term hold. One lot was in my name and the other was in my pension name. However I now need to sell in approximately one year. The cost was 5k and $40K and now being sold for $25K and $80K can I move them into an LLC and then complete the sale only to reduce the complications of withholding tax. The buyers are prepared to accommodate a 1031 exchange but I dont know how soon I can find a similar purchase in the auction. So question is what is the better option 1031, LLC or simply have my foreign company make a charge for most of the profit during the sale as I do not have a local agent representing. Thank you

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    Hi Henry,

    There are a number of potential issues here.

    First, you should be very careful about combining the properties into one (1) entity as you might unintentionally create a prohibited transaction by combining personal funds with retirement account funds. 

    Second, as a foreign investor, you will likely have FIRPTA issues to deal with (Federal withholding at 10% to 15%) and CalFIRPTA (California withholding at 3.3333%).  The Federal withholding requirements can complicate a 1031 Exchange transaction, but they are manageable if addressed promptly and proactively.  The Federal withholding must be made, but you can obtain a Certificate of Exemption from withholding. 

    Third, LLC's do not always reduce withholding requirements. I would consult with a FIRPTA withholding expert to ensure that you know what you will be faced with before you proceed.

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  • Henry W.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 17 posts · 1 vote
    10y

    Thank you so much Bill for pointing me in the right direction I do think the Witholding Taxes are not onerous coming to a maximum of 20% in total. Which is similar to what I would probably still pay even if I was not a foreign investor. Perhaps I should leave of the 1031 and llc and focus on finding a withholding tax expert to ensure a smooth sale.

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