1031 Exchange Entity Question

5 Replies

I purchased a buy and hold propery 5 years ago for cash in my name only. Last year I got married and put this property into a LLC with my wife, and in our trust.

I'm looking to 1031 this property now but wanted to know if I needed to wait a certain period of time to do this? I've heard some people say there's not a clear and cut rule about how long I have to own it before 1031'ing it again, and I've heard 2 years also.

My questions are:

1) Is there a seasoning period for owning a property before 1031'ing it, to not be labeled a dealer?

2) Independent from question 1, would changing it from my name to a LLC matter at all if I decided to 1031 it, one year after changing entity structure?

Thanks for your help, always appreciated!

Greg Junge

@Greg Junge , It's entirely possible that the moves putting the property into an LLC with your wife and then into your trust did not change the taxpayer of 5 years. If you and your wife file a joint return, if the LLC is taxed as a sole proprietor and reports on your personal tax return, and if the trust is a revocable living trust then all of those would be disregarded entities and the tax payer is still you and your return after 5 years - 1031 away.

Aside from that there is not statutory holding or seasoning period.  Only the issue that whoever the taxpayer is who sells and starts the 1031 acquired the property with the intent to hold for productive use.  My guess is that these moves were not designed to position the property for resale but were intended to simply provide asset protection and estate planning for a property that you intended to hold.  And now it is time to sell.  That is an appropriate use of the 1031.  

@Dave Foster I have a property that I rent. I would love to 1031 exchange it for another property but I want to downsize a bit. Can I exchange a $325k rent home for a $190k home and if not can I split the $325k rental into 2 rental properties that value about $360k-$400k in total value? Thx.

@Tony Provenzano , In order to defer all tax you must purchase at least as much as you sell.  But you can purchase less.  the IRS says that the difference is a way to take profit so it's taxable but you still shelter whatever gain would be left after that.  In your example if you sold for 325 and bought for 190 you're buying down $135K so that would all be taxed as profit.  If you made $200K in total gain then you'd pay tax on $135 and shelter the other $65 in gain.  So the 1031 might still be worth it.  But if you only made $100K overall then you won't have any savings by doing what you suggested.

However, your second scenario is a great way to counter that.  All that matters is the amount of your reinvestment not the number of properties.  So using the 1031 to sell one $325K property and buy 2 $165K properties works perfect.  It's called a diversification exchange.  And you can allocate your proceeds anyway you want.  So you could buy one with maximum leverage and one with cash only.  It's all up to your choice.