Should/Can I transfer my Multi-Family property in an LLC

Multi-Family and Apartment Investing
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Should/Can I transfer my Multi-Family property in an LLC

Erik Williams
Investor · Parker, CO · Member since 2015 · 11 posts · 2 votes

I am currently under contract to buy my first Multi-Family (4plex) property and actively looking for my second property. Because of 1031 exchange rules, I have to make the purchase of the property under my own name, but would like to put it in a LLC to protect me in the future. My questions, does anyone know how long I have to wait before I can transfer my property over to the LLC? Also, would transferring the property (by quick claim deed possibly) violate my 1031 exchange rules? Could the transfer be seen has a sale? Lastly, how will the transfer affect my financing (will be putting about 30% down). Thanks for all your help.

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  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Erik Williams - Not sure about the 1031 rules, although I would imagine it only applies to the purchase, and a quit-claim would have no effect. The bigger worry is that the bank will see it as a sale and call the due on sale clause in the loan. No one seems to be able to find an example of that actually happening with a quit-claim to LLC, but everyone seems worried about it.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Erik Williams,   A 1031 exchange will start with the sale of a piece of real estate.  No matter how you've purchased a piece or how you've transitioned it entity wise, It's eligibility for 1031 will be established at the point of sale. When you're contemplating a 1031 scenario a couple of things are very critical.

    1. Property eligible for 1031 treatment is property you purchased to hold for productive use in business trade or for investment.  A frequent potential issue is when you transfer ownership entities near to the time of sale.  This can give the new entity the appearance of taking title primarily to re-sell which voids the possibility of a 1031.  

    2. The tax payer for the old property when you sell and begin your exchange must be the same tax payer (entity) that takes title to the new property.  So, once again you must be happy and settled for a while on the entity holding your property well before you sell it and start your exchange.  

    But given the above parameters here's some options you have.

    1. Contributions into and out of entities are usually not taxable events. So if you want to purchase in your name and transfer title into an LLC that is probably fine from the 1031 perspective as long as it is either a single entity LLC or as long as you do it a year or so before you sell it and always under the direction of your accountant. @Kevin Siedlecki makes a good point.  Do be careful with financing and broach the subject with your lender to not trip up a due on sale clause.  You don't want to be the first and believe me, when the banks start getting nervous there will be increased scrutiny.

    2. I would not recommend transferring property into a new entity immediately prior to sale in order to adjust the tax paying entity.  But it is perfectly fine to complete the 1031 exchange and then immediately transfer the property into a different entity to begin your new period of productive use.

    3. I mentioned a single entity LLC earlier. These are typically disregarded entities for tax purposes as the LLC does not file it's own tax return and activities are reported on your own Sched E. This makes you the real tax payer for that property anyway. So the actual deed - whether LLC or you- is irrelevant to the IRS for 1031 purposes.

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  • Erik Williams
    OP
    Investor · Parker, CO · Member since 2015 · 11 posts · 2 votes
    9y

    Thank you Kevin and Dave for your help.  It is much appreciated.

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  • Marc C.
    Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes
    9y

    Remember, a single-member LLC is disregarded for tax purposes, so, it seems to me (not an accountant) that, unless you have partners, you could deed it to the LLC whenever you like.

    That said, why not ask the 1031 Exchange qualified intermediary what they recommend as far as timing? 

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