1031 Tax Strategy, LLC, and Self Directed IRA OH MY!

Tax, SDIRAs & Cost Segregation
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1031 Tax Strategy, LLC, and Self Directed IRA OH MY!

Jeffrey Mayer
Duluth, GA · Member since 2016 · 13 posts · 1 vote

Hey BP'ers,

I have a few questions regarding the tax/ income implications of some buy and hold real estate. I want to emphasize that these questions will be centered around buy and hold which is why I am beginning a new topic.

I read every where about the tax strategy using the 1031 exchange to defer capital gains tax, under the circumstances does it make sense to purchase & sell long term, 3 year minimum B&H investments, using this strategy. Additionally would there be any counter points due to the cash flow. My thoughts would be that at some point I might want to see the property so if we could limit the capital gains this would help but I am not sure of any harm this strategy would cause.

When seeking out a tax professional do I need to focus on somebody in my state or are CPA's well versed enough to be able to operate over party lines.

Lastly, are the only real advantages of using an LLC the benefit of limiting your liability to your business only. Or , are there other advantages to the LLC. It has been described to me as a "Pass-Through" entity many times which is why I ask the question.

Hope everyone has a great day!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Jeffrey Mayer, I think you'll get some interesting perspectives with this post.  I wanted to just mention two things regarding the 1031 part of your strategy.  You mentioned a 3 year B&H strategy.  That may be a number that fits into your investment strategy.  But the 1031 is much more flexible than that.  There is actually no specific holding period to qualify for a 1031 exchange.  You only must have the intent to hold the property for productive use.  However most conservative investors try to go at least a year before re-evaluating their intent.  In your case you could purchase those properties and then re-evaluate them every year to see if they still fit your investment requirements.

    The "pass through" nature of a single entity LLC means that the LLC does not file it's own tax return and all activity is reported on your individual tax return. Opinions on the legal protection of such an instrument are all over the map. But it is important to remember that when doing a 1031 exchange the tax payer for the property being sold must be the same as the taxpayer for the property being purchased.

    When using an LLC taxed as a partnership or corporation or some other business entity to hold property that entity will have to do the exchange and sell and buy. This can become problematic if financing is involved since lenders are much more rigorous in their requirements for funding a business entity. With a pass through LLC you are really the tax payer even though your name is not on deed. So you can sell as the LLC and buy as yourself if there's an issue with funding etc.

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