Put primary residence into LLC in order to 1031 exchange it?

10 Replies

Hey fellas,

One of the members of our LLC wants to contribute his personal residence so that we can 1031 exchange it up to a larger multi family. If he moves his personal residence into the LLC would that allow us to 1031 exchange it?

@Justin Ramos

A personal residence can’t be involve in a 1031.

Has to be an investment property to another investment property

He's exempt from personal gains 250 or 500k if he's lived in it few years...

@Justin Ramos , First he needs to verify what @Matt K. is saying. If he qualifies for the exemption (and remember that the requirement may go from 2 out of 5 years to 5 out of 8 years on Dec 31) then he gets that profit tax free and can contribute cash to the LLC if he wants which helps everyone out.

Once he contributes it to the LLC it would cease being his primary residence that is true But that does not mean that it is a 1031 eligible investment. The LLC would need to accept it with the intent to hold it for productive use. If it takes title simply to resell then it is not eligible for 1031.

Murky isn't it??

  

1031 also a huge pain and stressful...deadlines don't look bad on paper but in a competitive market it's frustrating and nerve racking...

Originally posted by @Jordan Moorhead :

Why doesn’t he just sell it?

 He has a house in NYC that's worth over a million. He is single and could get an exemption for 250k of his profit but the rest would get slammed with taxes.

Originally posted by @Dave Foster :

@Justin Ramos, First he needs to verify what @Matt K. is saying. If he qualifies for the exemption (and remember that the requirement may go from 2 out of 5 years to 5 out of 8 years on Dec 31) then he gets that profit tax free and can contribute cash to the LLC if he wants which helps everyone out.

Once he contributes it to the LLC it would cease being his primary residence that is true But that does not mean that it is a 1031 eligible investment. The LLC would need to accept it with the intent to hold it for productive use. If it takes title simply to resell then it is not eligible for 1031.

Murky isn't it??

  

 Yea that is pretty murky. Any idea how long we'd have to hold it for to get the IRS off our backs? :)

what's his cost basis though

@Justin Ramos Every 1031 advisor is going to recommend a different hold time. The IRS doesn’t specifically state that a property must be held for a certain amount of time. Some professionals may recommend 12 or 18 months. In my opinion, I would recommend 24 months because it straddles three tax years and you can easily prove your intent.

@Justin Ramos , Your friend has some possibilities. But I still am having a tough time getting around the LLC needing to establish intent. If the LLC was willing to accept the property and hold it for bit that would change things. I'm just sensing that LLC idea is not going to provide much of a benefit in terms of time and shelter.

Regardless of when and how he sells it he has the opportunity to take the exemption as long as he still qualifies as having lived in it for 2 out of 5 (or maybe 5 out of 8).

.  He's probably better off moving out after Dec 31 when he knows what the tax reform bill will be  so he can ensure that he's met the residency requirement and converting it into investment himself for a year or so.  Then he can sell and take the first $250K tax free and put the rest into a 1031 to defer the rest.

Seasoning is always a question mark because there is no statutory guidance.  There is so little case law.  And t least 3 applicable case rulings have indicated a hold period of anywhere from 2 years to 2 calendar years to 2 tax years.  Some bright lawyers figured out that was range from 2 - 670 days. So go figure!  

For a long time the mantra was "one year and one day" because that always crossed over into capital gain, met any of the above court interpretations, and placed the property on two consecutive tax returns. There's been nothing to further memorialize or refute this practice other than that the service has been willing to attack regardless of hold time if they feel that the intent was not demonstrated adequately at the beginning. Another reason why I don't like that LLC option unless the LLC will hold for a good bit.

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