1031 From Personal to LLC w/Partner

5 Replies

I'm looking to do a 1031 from a SFR owned in my personal name to a commercial MF property which will be owned by an LLC w/ a partner (50/50 ownership). FYI- the partner is not my spouse. I've read about some of the difficulties in doing this, however I know people do 1031's into syndicated deals so I would assume this is similar. I was told titling as Tenants In Common would solve this but the paralegal handling the purchase thought there would be an issue with ownership % interest. I appreciate any help and guidance.

@Chris Virgil-Stone , as long as the TIC interest you take in the new property is equal to or greater than the dollar amount of your net sale you will defer all tax.

The only way your scenario works is if the taxpayer for the old property is the same as the taxpayer for the new property.  Since you're the one doing an exchange and you personally are selling then you personally need to take title to the new property.  You can't purchase membership interest in an entity that owns real estate.

One option you may want to think about to give you some additional liability protection when moving from residential to commercial would be to take title to your TIC interest in a "disregarded LLC" . This is a single member LLC that is taxed as a sole proprietor and does not file it's own tax return. All activity of the property owned by the LLC is still reported on your personal tax return. So even though the LLC owns the property the taxpayer has not changed.

It's not a bad model (and very flexible with 1031) to have two LLCs take title as TIC. And then have a managing agreement with a 3rd LLC to run the property.

Thanks @Dave Foster , that's really helpful. If I structured it with me or my personal LLC purchasing the property as TIC with my partnership, wouldn't there be a issue with % ownership since I own 50% of the LLC and would also have interest as TIC? I've read about not being able to collect profits from both entities if structured this way, though I'm not sure how true or relevant to this situation it is.

@Chris Virgil-Stone above my pay grade to be real smart on this one.  Let's see what some of our esteemed CPA colleagues think - @Natalie Kolodij , @Ashish Acharya , @Eamonn McElroy , @steven hamilton??  

My "Joe the plumber" take on that would be from experience that I don't want income from my TIC ownership entity. I get income netted in a K1 from our management entities.

@Chris Virgil-Stone

Generally the taxpayer who owns both the real estate asset being disposed and the replacement real estate asset must be the same.  1031 exchanges are easy to bust if you handle them the wrong way and don't have solid knowledge of the applicable code, regs, and case law.

The questions you're asking are good and your thinking is on the right track, but they are advanced planning and structuring questions that are best directed to a tax professional you've engaged who can have the deep conversation with you and understand your facts, circumstances, and goals.

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