Real Estate Attorney and CPA consultation: best practices

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Real Estate Attorney and CPA consultation: best practices

Leta Eydelberg
Member since 2020 · 10 posts · 6 votes

Hello,

We are looking for Real Estate Attorney and/or CPA to consult about best practices for buying and managing investment properties. 

A little of our background.

We are located in North California. We owned one investment property which we just sold and are in the process of doing 1031 exchange for multiple properties. We have tons of questions. For example:

Our old property was in our name, and we'd prefer to have LLC instead but were told that we cannot change ownership status during 1031. Is that correct? What should we do?

How to set up LLC and transfer ownership of the investments? How to process payments and what accounts to use? Basically, what are the best practices to do to protect us and from the tax standpoint?

We would really like to urgently find a knowledgeable attorney and CPA to work with.

Thank you for any advice and recommendation!

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y

@Leta Eydelberg

Being in the middle of a 1031 exchange is not the best time to find a tax advisor and work on a plan. Sort of like looking for a good pilot and a map while already flying. :)   But better late than never.

You can acquire the replacement properties inside a single-member LLC which is disregarded for tax purposes. But you cannot acquire them inside a multi-member LLC filing as a partnership, that is correct.

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  • Bill HamptonBusiness Member
    Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 977 votes
    6y

    @Leta Eydelberg

    Are you comfortable working with your CPA remotely? If so, you open yourself up to a larger pool of candidates. There are 20+ CPAs and accountants on this site. Reach out to a few and see who you like. 

    Good luck and let me know if you have any questions. 

    404-482-3170
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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y

    @Leta Eydelberg

    Being in the middle of a 1031 exchange is not the best time to find a tax advisor and work on a plan. Sort of like looking for a good pilot and a map while already flying. :)   But better late than never.

    You can acquire the replacement properties inside a single-member LLC which is disregarded for tax purposes. But you cannot acquire them inside a multi-member LLC filing as a partnership, that is correct.

    2Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    6y
    Originally posted by @Leta Eydelberg:

    Hello,

    We are looking for Real Estate Attorney and/or CPA to consult about best practices for buying and managing investment properties. 

    A little of our background.

    We are located in North California. We owned one investment property which we just sold and are in the process of doing 1031 exchange for multiple properties. We have tons of questions. For example:

    Our old property was in our name, and we'd prefer to have LLC instead but were told that we cannot change ownership status during 1031. Is that correct? What should we do?

    How to set up LLC and transfer ownership of the investments? How to process payments and what accounts to use? Basically, what are the best practices to do to protect us and from the tax standpoint?

    We would really like to urgently find a knowledgeable attorney and CPA to work with.

    Thank you for any advice and recommendation!

    Personally I'd consider avoiding the LLC in CA due to the minimum $800 franchise tax. I'd just purchase more insurance. You may want to discuss that over with an attorney.

    The post above is correct the time to find an accountant was in November December or before the 1031 started and not during it and during tax season. 

    Best practices are keeping separate accounts, detailed books and all records to ensure that you are tracking every expense. 

    [email protected]224-381-2660
    1Reply
  • Leta Eydelberg
    OP
    Member since 2020 · 10 posts · 6 votes
    6y

    Steven and Michael,

    I am sure you are right. We did try to find CPA back in November and met a couple of people highly recommended. We left very discouraged. Besides the fact that they gave us opposite answers to our questions, they did not seem to be dealing with investment properties much at all. 

    So now, as I came across this forum a few weeks ago, we realized that we should try finding an attorney and CPA here as members are very knowledgeable. As Michael said, better late than never.

    As @ Bill Hampton suggested, we are open to working remotely. 

    Thanks again for all the replies!

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Leta Eydelberg, not to beat a dead horse here but like others have said it's also too late in the day to be asking for 1031 rules interpretations once you've chosen an intermediary and started a 1031.  What the QI said is what they will allow.  You will not get your intermediary to change because some other intermediary or CPA say's it can be different.  So I'm afraid you're stuck with that QI and direction they've chosen for you.  

    For the benefit of all and for next time for you guys - There are some limited circumstances where you can change the ownership entity without violating 1031 statute.  Deeding is a state convention that is basically irrelevant to the IRS.  Ask your QI who the taxpayer was for the property and if they can see a way for a different deeded entity to still be that same taxpayer.  Hopefully they'll have an idea.  Shame on them if they don't.

    The 1031 Investor5137 Reviews
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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y

    @Leta Eydelberg

    To add to @Dave Foster's comment: you're in the middle of the process and at the mercy of an exchange intermediary. (I sincerely hope you do have an intermediary involved, otherwise you don't have an exchange to discuss at all.) Assuming it was an intermediary who said you could not change ownership, my guess would be that they specifically said that you could not change to an LLC jointly owned by the two of you which would be a partnership for tax purposes. There're nuances here, but as Dave said - you cannot do anything that an intermediary won't approve of.

    It is possible to transfer the properties into an entity after the exchange is completed, but I would not rush this without discussing pros and cons with the kind of people you're looking for: attorneys and accountants specializing in real estate. 

    Since you're open to working remotely, you can choose from many of the tax experts on this forum. As to an attorney, he ideally should be licensed in the state where you own properties, as well as the state you live in, if different. Real estate law is state-specific.

    1Reply
  • Leta Eydelberg
    OP
    Member since 2020 · 10 posts · 6 votes
    6y

    @Dave Foster, 

    When we realized it's important who QI is it was too late to change them, we were closing our sale next day. So we'll have to do the best we can now :)

    I am surprised though by the comments that we are at their mercy. There must be rules everyone follows, they cannot just do what what they please without any reason.

    We'll be talking to an attorney, but from the replies here and other sources I understand that it's possible to move the new properties to LLC at some point in the future, once 1031 is complete. Is that correct and what is a good time to do so? What do other people in similar situation (Buying the property in their name and then deciding to transfer it to LLC) did?

    Thank you for all the comments!

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Leta Eydelberg, Sorry for your experience.  That's not how a 1031 is supposed to go :(  The only thing that makes a qualified intermediary officially qualified as an intermediary is if they are not a related party to the client either by business or blood.  Most good QI firms are made up of attorneys and accountants.  And even they can have very different ideas about actions in the exchange depending on their own internal controls, reading of case law and risk aversion.  But literally anyone can make a web site, copy a few articles, set up a pay form and advertise as a QI for 1031 exchanges.  

    This you've learned the hard way! But they have contracted with you to facilitate your exchange so you have to follow their rules.  The only three options are to do it their way, Substitute a new Qi which there is a process for but it costs you and they still have to cooperate.  Or they may let you do it your way but require you to indemnify them for any and all of their actions and counsel.  Either way this is bad for you.

    You can indeed move the properties into a new LLC at some point. There is no firm guidance on the length of time needed. We have tax advisors who say anywhere from two years down to one day. The issue with this is that for a period of time the properties will be in your own name and that not only keeps you at risk. It also weakens the corporate veil once the properties are in a new LLC. It's hard to argue that you never owned them personally.

    And since you've tolerated my rant about the industry here's another potential nugget that might help. A single member LLC that does not file it's own tax return (chooses to be taxed as a sole proprietor) is a disregarded entity for federal tax purposes. Whether the property is in your name or in the name of such an LLC, it is still reported on your personal joint tax return. So no matter how the property is deeded you and your husband are still the tax payer. So the tax payer doesn't change and the 1031 can be completed that way. That removes you one more degree in the corporate veil argument and doesn't leave you hanging liability wise with the properties in your name for an extended period of time.

    Beware that there are some state issues with this as it relates to community property.  But that's where your attorney comes in.

    The 1031 Investor5137 Reviews
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  • Leta Eydelberg
    OP
    Member since 2020 · 10 posts · 6 votes
    6y

    @Dave Foster,

    Thank you very much for your insight! We'll be learning more.

    1Reply
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