Can you 1031 a property from an existing LLC to a new one?

[Matt Said]

Currently have a Wisconsin LLC with 3 MF properties, we are currently selling 1 (but likely all 3) with plans to move the funds to invest in the South. Our CPA advised that it would be best to create a 2nd/new LLC in the state where we will invest next. Trying to do a 1031 exchange to avoid the tax gain as we likely want to do a buy/hold. Any thoughts if this is possible - sell from one LLC and 1031 funds to the new LLC? The LLC agreement for both old & new are the same two equal partners.

Thanks!

[Dave Foster]

@Matt Said, Not an uncommon problem. Some states require a domestic LLC. Some will allow you to domesticate a foreign LLC. So that will be an issue and/opportunity for you to adjust within the 1031.

It is really the tax return that reports the activity of the property that is critical. A disregarded LLC is one that does not file a tax return. All of the activity of the property is reported on your personal tax return. That makes you the tax payer for the property regardless of what name is on deed since the only way we communicated with the IRS is with tax filings. So in this event you can sell as the LLC and buy as yourself or sell as the WI LLC and buy as another disregarded LLC in the other state.

If the other member of the LLC is your spouse and you file a joint tax return then that is still technically one member of the LLC - your joint tax return. So from the 1031 perspective your WI LLC could still be disregarded if all of the activity of the property was reported on your joint tax return.

If the other member is not your spouse then it has to be a regarded entity. You can easily check to verify - if the LLC files a tax return and gives membership statements to the members then it is regarded and we have to tread more carefully.