Long time lurker and first time poster. If this isn't the right place, feel free to move it.
I purchased a rental property many years ago and have been filing taxes under my personal income since I never put it into a LLC. I also have a small business that I run, which is a single member LLC. I'm considering selling my rental property to buy property for my small business to operate out of and utilize a 1031. I have a few questions:
First question, is this allowed?
Second question, if I do this, should I form a LLC for the new property to rent to my business or can I just use the property for my business as is?
Third question, if I don't form a LLC, tax filing wise, would I include the write offs for the property under my individual income, or as part of my small business?
sorry if this has been answered before. I've been searching for a while and couldn't find anything.
@Brian Leong , That is actually a great use of the 1031. Property that qualifies is any investment property you intend to use productively for investment. A property housing your business would be perfectly fine.
The question of ownership might not be such an issue. The property is in your name and reported on your personal return. That makes you the tax payer for the property. And your business is a SMLLC. If that LLC has chosen to be taxed as a sole proprietor then it too is reported on your personal return - schedule C probably. That again makes you the tax payer for the business. Or really what is happening is that your tax return is the tax payer for both the LLC and the property.
In a 1031 the taxpayer for the old property must be the same as the taxpayer for the new property. So selling as yourself and buying as that LLC or yourself would be permissable as the LLC is a disregarded entity. Much is going to depend on what your accountant prefers as to the other tax impacts of owning in your LLC.
But either way works if that LLC is disregarded. You can own it as yourself and simply let the LLC use it. Or the LLC can own it. If the LLC is a regarded entity then you would have to take title to the new property in your name. But that then leaves open a bunch of options on how you treat it relationally with your LLC - whether you rent it to the LLC or what have you.
Dave, thank you for such a detailed response. One thing that I was considering was liability of the small business and protecting the property. My small business is sole proprietor so it is a disregarded entity. For tax purposes if I report the property under my small business, would that put my property at risk if there is a lawsuit or bankruptcy in that small business? Right now since it is outside of the LLC, it is protected.
Also on my tax returns, is it kosher for me to treat it as rental property and then charge rent to my small business and then claim the rent as part of my small business P&L? Or does the IRS prefer to see it differently? Or is there a more optimal method that is recommended?
@Brian Leong , those questions are really just going to be your accountants preference. Since all the entities are disregarded they're all being reported on your personal tax return. So you accountant is just going to have a preference on which part they place them.
And again, since everything is disregarded using the property by your business or renting the property to your business is just going to be an accountant preference. from the 1031 perspective it really doesn't matter. I can see some liability protection (or at least anonymity protection) in having the company rent the property. That will generate Sched E income and Sched C expense.
The unique structure of your return will determine which is best.