1031: single private owner --> LLC assistance

7 Replies

HELLO BP land: there must be many many folks whom have done 1031s here and many attorneys and CPAs but I wanted to know...

we have a SFR title is in wifes tax ID (we live in WA but house is in CA [where we used to live]).

we plan to 1031 into a larger MFR property. That property for obvious reasons (liablity protection/ taxes etc.) we want in a LLC.

if wife's tax ID is on the downleg (the SFR) and the LLC would have her as at least 1 of the members or managers of the LLC (say future property is in WA or AZ then it would be WA or AZ LLC) is that good to go ?

Ideally want to have both wife and I as managers of the future LLC (the upleg)... if that;s the case do we both need to be on title on the downleg (the SFR)? in which case i presume I quit claim deed to get me on the title w wife?

do i have to put the property into a LLC 1st and THEN be able to sell ? (so its same LLC entity prior to selling and keep the same entity for the upleg)?

I dont want to create a CA LLC at this point since we are just about to sell and FTB fees etc not likely worth it but we must have LLC for future apt building purchase.

I wonder how others' have done this as I suspect this isnt that infrequent (prior personal residence--turned rental then 1031 that rental into some future rental building)

thanks in advance

Need to have the same SSN on the sell as well as the buy. Why not just wait until after the transaction to do the LLC conversion. Whether or not you need an LLC is a different question unless you have a lot of assets. Most just get umbrella insurance.

@Aaron Kaplan

First, have you considered holding one single family property in a LLC isn't "absolutely" necessary? At least one new thread comes up everyday from people thinking they have to have a LLC. Also, I'm not a big fan of transferring Title since it looks more to be of co-mingling. Here is one thread on it -- be sure to read the last post which is CA specific

https://www.biggerpockets.com/forums/51/topics/850249-setting-up-legal-entites

The 1031 obviously provides a complication...

Sounds like with what you are trying to do, you need to talk to a professional and anything here probably won't be much, honestly. So, in the end state you want to be in a LLC. So, you want to create a LLC out of CA, don't register it in CA (which has its complications but maybe not so much in your case), transfer Title to the LLC (I guess in this market you won't care about the existing mortgage), then 1031 the property that is in the LLC. I guess most of the arguments against transferring and many other things go out the window if you hold it short term, ie you are selling. Work it out with an attorney, but you should be to be added to the LLC at anytime, but probably after the 1031 for tax purposes.

Good luck.

@Aaron Kaplan Aaron, I've only done an LLC once and that was because we started with properties owned by me and others separately owned by my wife when we wanted to combine for a 1031. Like most in here you would probably be over $5M or more before needing an LLC. Umbrella insurance is what they will go after as it will be asked.

Originally posted by @Mark H. Porter :

Need to have the same SSN on the sell as well as the buy. Why not just wait until after the transaction to do the LLC conversion. Whether or not you need an LLC is a different question unless you have a lot of assets. Most just get umbrella insurance.

We have Umbrella ins as well. Definitely need that for sure!

thanks

 

@Aaron Kaplan , From the 10,000 ft view the tax payer for the old property has to be the tax payer for the new property in a 1031 exchange. The question though is going to be who is the tax payer.

If you and your wife file a joint tax return then in the IRS eye's you are the same tax payer.  So going from a property in her name only to a property owned jointly by the two of you would not technically be changing the tax payer.  However, when you start talking LLCs that can change things - or not.

For 1031 purposes, an LLC that only has one member (you and your wife and the joint return) and chooses to be taxed as a sole proprietor is considered a disregarded entity. It does not file its own tax return. All activity of the property is reported on your tax return. So even if the replacement property is titled in the name of the LLC the tax payer again has technically not changed.

So if you're plan involves an LLC there are some possibilities. Your multi state situation can complicate it a bit especially with the mix of community property/Equitable distribution states. But there's still some ways to accomplish this.

Originally posted by @Dave Foster :

@Aaron Kaplan, From the 10,000 ft view the tax payer for the old property has to be the tax payer for the new property in a 1031 exchange. The question though is going to be who is the tax payer.

If you and your wife file a joint tax return then in the IRS eye's you are the same tax payer.  So going from a property in her name only to a property owned jointly by the two of you would not technically be changing the tax payer.  However, when you start talking LLCs that can change things - or not.

For 1031 purposes, an LLC that only has one member (you and your wife and the joint return) and chooses to be taxed as a sole proprietor is considered a disregarded entity. It does not file its own tax return. All activity of the property is reported on your tax return. So even if the replacement property is titled in the name of the LLC the tax payer again has technically not changed.

So if you're plan involves an LLC there are some possibilities. Your multi state situation can complicate it a bit especially with the mix of community property/Equitable distribution states. But there's still some ways to accomplish this.

Thanks @Dave Foster! Much appreciated.