1031 exchange, personal/rental to llc, and ways to extend4 deal?

Question

Acquired property in Raleigh NC Briercreek, 150k, few years rental, paid off cash; titled personal name,

Selling 225k, want to buy a property elsewhere cash, look for deal, auction, and pay it in same cash, and live part time in it, and airbnb it also as rental.

will this fly as 1031 exchange, (like buy new as LLC, single member, single member live part time in property, airbnb it)

and are there legal loopholes to extend 45 day deadline for a new deal.

Lynne Bagby · Answer

HI Matt!

You have quite a few variables here.

1 Tax ownership must stay the same from the sale of the relinquished property through the purchase of the replacement property. IF you have been reporting income and expenses under your SSN for the NC property, upon purchase of a replacement property in a 1031 exchange, you are able to purchase in an SMLLC, taking the "indivicual" tax election (not the corporate), b/c you would continue to use your SSN to report income and expenses as before. This would make the SMLLC "disregarded" for tax purposes

2. IF you sell for $225,000,  your replacement property should be "equal or greater in value" than the relinquished property you sold (net the "allowable" costs of sale); ALL remaining cash (which would go to the QI at the close of the sale) is used to purchase the replacement property. Any shortage would be made up by bringing in your own personal cash or mortgage money.

3. The property you purchase must be used for "productive use in a trade or business or held for investment". IF you choose to use this property for "short term" or "seasonal rentals" AND wish to have some personal use time, please refer to IRS Revenue Procedure 2008:16 and discuss it thoroughly with your CPA.

4. There are NO extensions to the "180-day" exchange timeline which includes the "45-day" identification period in a 1031 exchange. (The only exception would be in a federally declared disaster when the IRS issues a memo which specifically mentions extensions to the exchange timelines and issues its instructions).

Please discuss your plans with your CPA/tax advisor.

Matt Berklacy · Answer

You really know your stuff !!!!!  thanks..wow.. im in ..good teaching..

Dave Foster · Answer

@Matt Berklacy, There's quite a bit of flexibility in your first question.  Any type of property will qualify for your 1031 exchange as long as your intent is to use it for productive investment use.  That includes a property that you use some for personal use or has a split use component (like host quarters in a BNB).  There are some tax reporting limitations an consequences depending on direction you choose but these should not hinder your ability to complete the 1031.

The entity component of it also gives you some room.  It is the taxpayer who must remain consistent from sell to buy.  That can be different than who is on deed.  If you want to sell as yourself and then buy as a single member LLC choosing to be taxed as a sole proprietor that would be fine.  the reason is that the LLC will not file it's own tax return.  All activity of the property will be reported on your personal tax return where it is now.  So the tax payer is not changing.

The other question is as black and white as it gets - there are no exceptions and not extensions of the 45 day list for an individual client.  Occasionally in a national disaster Congress will extend some reporting deadlines like the 45 day list.  But that's for entire regions never for an individual.  So don't wish that on us :)

Some things you can do though -

1. Start shopping well before your old property closes .  If you find the perfect property get it under contract even before your sale happens.

2. Use contingencies (both on sale and purchase) to extend closing dates so you have more time to shop.

3. If it's a market where finding a replacement is so much tougher than selling - use a reverse exchange.  Your QI purchases the new property and holds it for you prior to your sale.  So you have complete control of the new property but no ownership of it and it qualifies still as your replacement property.