1031 Exchange Deal in New York

Investor · North Tonawanda, NY · Member since 2015 · 18 posts · 3 votes

Hello! My buddy in Buffalo, NY is doing a 1031 exchange and may run into a potential issue which could happen to myself in the future as well. The house he sold was paid off and in his LLC. The current deal is for a 4plex and he cannot get a mortgage in his LLC. He has to get one in his name. So my question is can you still do a 1031 exchange if the house you sold is in your LLC and the house you are buying is in your name?

Thank you!

Jesse

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Dan Schwartz

Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes

@Thomas N. a 1031 exchange is a federal process, since its driven by the IRS code. You can use a qualified intermediary that is based anywhere. There is a fairly-recent thread that showed how unregulated the business is, and how easily one can fall into subpar hands. Unless you are set on personally sitting across the table from your QI, there is no need to limit yourself to NY-based QIs. Fees average close to $1000 with most firms. Some for less, some for more.

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Eric WinstanleyPro Member
Rental Property Investor · Buffalo, NY · Member since 2016 · 154 posts · 60 votes
8y
Hey Jesse,
I have talked with RJ Gullo in the past regarding multi-family investments. They are very experienced in Western New York 1031 exchanges. I would recommend connecting with them. Tony Gullo is part of their family business and part of BP
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Dan Schwartz
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
8y
@Jesse Imes he "can't" get a mortgage in his LLC, or he "won't" get a mortgage in his LLC, due to the higher cost of money and shorter term? Unfortunately, his qualified intermediary should have flagged this. The cost of the LLC mortgage, and possibly the cost of them refinancing/selling to his personal name if he wants it held/leveraged that way, will be steep. Good luck to him.
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Thomas N.
Investor · Nassau, NY · Member since 2016 · 55 posts · 13 votes
8y
@Eric Winstanley, What is the typical cost to do a 1031 exchange in NY? Something I may do in a few years also. thanks.
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Eric WinstanleyPro Member
Rental Property Investor · Buffalo, NY · Member since 2016 · 154 posts · 60 votes
8y
I'm sorry I don't have experience with 1031 exchange pricing. I would contact @tony gullo.
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Dan Schwartz
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
8y
@Thomas N. a 1031 exchange is a federal process, since its driven by the IRS code. You can use a qualified intermediary that is based anywhere. There is a fairly-recent thread that showed how unregulated the business is, and how easily one can fall into subpar hands. Unless you are set on personally sitting across the table from your QI, there is no need to limit yourself to NY-based QIs. Fees average close to $1000 with most firms. Some for less, some for more.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Jesse Imes, This is not an uncommon situation. The regulations require that the taxpayer for the old property be the tax payer for the new property. However, Tax payer might be different from deeded owner. Depending on the actual circumstances there are options.
1. If the LLC is a single entity LLC that chooses to be taxed as a sole proprietor then it does not file it's own tax return. It is considered to be a disregarded entity and all activity is reported on the Schedule E of his personal tax return. In that event Your friend is actually the tax payer anyway for federal purposes. So it would be allowable for him to sell as the LLC and buy as himself for 1031 purposes. We don't prefer that because we would rather see all docs match but it can and has been done.
2. If the LLC is regarded and files its' own tax return then there is no option. The LLC is the tax payer and the LLC must sell and it must buy to complete the 1031.
This gets into the questions @Dan Schwartz asked - Is it that he can't get a loan in the name of the LLC or he wants a preferential rate?
Some would counsel to switch the property from the LLC to himself prior to closing. But that activity right before the start of a 1031 has been consistently attacked by the IRS for years. Don't do that unless you can do it at least a year ahead of the sale.
However, after the exchange is complete a contribution into or distribution our of an entity to the members is not generally a taxable event. So if he wants to get short term financing in the name of the LLC to complete the 1031 and then do a refi in his own name to take advantage of rate he could do that.
It's unfortunate, but the first thing that many folks are counseled to do is to create entities to shelter them from liability. But it is these very shelters that work against you when pursuing financing. But I wouldn't give up hope yet. His QI should be versed in this and can guide him.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Thomas N., a garden variety 1031 exchange by a national company will cost generally between $700 - $1000. They're a little more expensive on the coasts and where done by attorney's with small scale. You can find them for $400 - $500 on the internet but you're on your own with those. And there's horror stories right here on BP about what can happen.
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Dan Schwartz
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
8y
@Dave Foster you inadvertently answered a question I had, but was unable to articulate just yet. I still don't know the right question :-) but I am happy to know that the answer is "the taxpayers must be the same" and that there can be circumstances where a disregarded LLC can 1031 to personal name and vice versa. Thanks!
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Jesse Imes
OP
Investor · North Tonawanda, NY · Member since 2015 · 18 posts · 3 votes
8y
Thank you everyone!
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Lauren SpeidelPro Member
Qualified Intermediary for 1031 Exchanges · Chicago, IL · Member since 2017 · 164 posts · 119 votes
8y
@Jesse Imes - @Dave Foster is correct. The same taxpaying entity selling the relinquished property must be the same taxpaying entity that purchases the replacement property. There are some exceptions to this rule: If the LLC is a single member LLC disregarded entity (the LLC files along with taxpayer's personal tax return) or the entity if a fully revocable grantor trust disregarded entity (and once again files along with the taxpayer's personal return). The IRS views these structures as the taxpayer, and vice versa. If it is not one of the above structures, then the taxpayer can run into some issues. If the entity has to file its own tax return then the IRS does not view them as one in the same.
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