Completed 1031. Filing Taxes Q (prev LLC, no more LLC)

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Completed 1031. Filing Taxes Q (prev LLC, no more LLC)

Uzair Syed
Member since 2019 · 10 posts · 4 votes

Hi,

This sounds more like a tax/accounting question but seeing if anyone has any insight here.

My parents just completed a 1031.

Relinquished property and replacement property both under parents names.

Accountant saying we filed taxes for the relinquished property under an LLC my parents had for past 5 years for tax purposes.

Note: the LLC did not own the property; my parents did under their names.

They cancelled the LLC 2 months ago (before replacement property was purchased ).

Accountant saying he's not sure how to file the 2020 taxes since the LLC doesn't exist anymore.

I'm not even sure if this has to do anything with doing the 1031 since the LLC never owned the relinquished property.

Thank you

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y

@Uzair Syed, most of this now is a question for your accountant or the accountant who understands and will stand behind their course of action.

If an LLC is dissolved it still has to file a final tax return for the year in which it dissolves. The IRS simply wants the tax return filed on time and the date of dissolution.

I don't have a clue whether 5 amended returns or asking forgiveness rather than permission would be better.

There is no statutory seasoning period.  The facts of each situation will determine an appropriate time period for changing the tax payer.  It could be immediately or it could be a year.

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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Uzair Syed

    When you do a 1031, you usually 1031 into a replacement property of higher value. I assume you did the 1031 sometime in 2020. There's three property entries that goes onto the schedule E if you 1031 one property into another of higher value.

    1. The original property. You'll list the income expenses including depreciation for the original property on the schedule E. You'll have this in the 2020 return.

    2. The replacement property is truncated into two. Replacement "1" is a continuation of the relinquished property, and has the basis and depreciation of the original. The depreciation will be that of the remaining life of the relinquished  property.

    3. Replacement part "2" is the boot, the part of the value greater than the original. It will have it's own cost basis and depreciation schedule. Income and expenses will be prorated between part one & two.

    Beginning in 2021, you'll have two properties listed on the schedule E, replacement part and two. In the future when you sell, replacement part one and two will each have it's own depreciation recapture and capital gain.

    Now this is if the 1031 is into a larger property. If smaller, you'll have a negative boot, and you'll pay capital gains on that one. You can 1031 into more than one property.

    The LLC is merely a past through, so you do the schedule E for the portion of the year you have the relinquished property for accounting purposes. If they completed the 1031, they would have done it through a QI, and the CPA should contact the QI to make sure the what names they used for the relinquished property and the replacement property, which be the same.

    I have talked to CPA's and many are not familiar with accounting of 1031's. 

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  • Uzair Syed
    OP
    Member since 2019 · 10 posts · 4 votes
    5y

    Thank you that's helpful

    Yes the replacement properties (bought 2) were greater than the relinquished property.

    Relinquished property sold in Dec 2020, replacements purchased in 2021...we had filed for tax extension.  

    Would that alter any of what you posted?

    Wondering if we should use another accountant for this because in speaking with him I got the feeling he wasnt familiar with this, hence my post here.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Uzair Syed, if the LLC was a disregarded entity for your parents the property would have been reported on their personal tax return and the LLC would not have filed a tax return. So that should present no problem to your accountant.

    If the LLC was a regarded entity then that LLC filed a tax return and the activity of the property was reported on that LLCs tax return. In that event technically your parents did not complete a proper 1031 exchange. The tax payer for the old property (the LLC has to be the same as the tax payer for the new property and that would be the LLC. Deeding is a state convention and doesn't always indicate the taxpayer.

    But in this case your parents couldn't just dissolve the LLC. The accountant would have had to file a final partial return. And that final return should reflect the 1031. Then the property would be distributed to your parents as part of the dissolution of the LLC.

    If the accountant doesn't file an 8824 and a final tax return for the LLC then there will be a disconnect in reporting at IRS central. that may get caught.

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  • Uzair Syed
    OP
    Member since 2019 · 10 posts · 4 votes
    5y

    @Dave Foster 

    Thank you.

    That seems to make sense and is scary (part about incorrect 1031).

    My dad did call the state the other day and they mention he could reinstate the LLC?

    So is the correct option to reinstate the LLC and file taxes under the LLC for 2020?

    The fact that the replacements were purchased under parents names hopefully won't invalidate the 1031? And what is important is how we file the taxes (ie. reinstate the LLC and file under LLC)?

    Thank you

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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Uzair Syed:

    Thank you that's helpful

    Yes the replacement properties (bought 2) were greater than the relinquished property.

    Relinquished property sold in Dec 2020, replacements purchased in 2021...we had filed for tax extension.  

    Would that alter any of what you posted?

    Wondering if we should use another accountant for this because in speaking with him I got the feeling he wasnt familiar with this, hence my post here.

    Looks like the relinquished property would be listed in the 2020 return. The replacements will be on the 2021 schedule E.  The relinquished property owner should be the same as the purchaser of the replacement property so I would make sure with their QI that it is so. They did use a QI, didn't they?

    As Dave Foster pointed out, the CPA should also know which forms to file.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Uzair Syed, just because the state has closed the LLC does not mean that the accountant cannot file a final tax return for it. For the IRS it's not closed until the final tax return. That would be appropriate. Then the 1031 will be reflected appropriately. And the final tax return will reflect the dissolution and distribution of the property to your parents. Once that happens all will match appropriately.

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  • Uzair Syed
    OP
    Member since 2019 · 10 posts · 4 votes
    5y

    Thank you very much

    Just so I am clear on this

    Would the LLC being closed make it unable to file future activity ? ie. purchasing the replacement property? ( since the replacement properties were purchased After the LLC was closed)

    Or is that not true? And we can leave everything as is (no ammending prior returns) and file tax returns for 2020 (sale of relinquished property) and 2021 (purchase of replacement properties)?

    Also, for how long after the exchange does the taxpayer for replacement property need to be same as the taxpayer for the relinquished property? 

    - Wondering bc if we do go the route of ammending the prior returns to parents names, but they ultimately do want to put the replacement properties under an LLC

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  • Uzair Syed
    OP
    Member since 2019 · 10 posts · 4 votes
    5y

    @Ashish Acharya Would love for you to chime in if able

    Thanks all so far

    Reassuring as it seems we can still preserve the 1031

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Uzair Syed, most of this now is a question for your accountant or the accountant who understands and will stand behind their course of action.

    If an LLC is dissolved it still has to file a final tax return for the year in which it dissolves. The IRS simply wants the tax return filed on time and the date of dissolution.

    I don't have a clue whether 5 amended returns or asking forgiveness rather than permission would be better.

    There is no statutory seasoning period.  The facts of each situation will determine an appropriate time period for changing the tax payer.  It could be immediately or it could be a year.

    The 1031 Investor5137 Reviews
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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Uzair Syed:

    @Ashish Acharya Would love for you to chime in if able

    Thanks all so far

    Reassuring as it seems we can still preserve the 1031

    Just wondering, did the tenants of the rental paid rent to the LLC? For 1031 purposes, the owners of record for the relinquished property and replacement property must be the same, which is what you said, and if the 1031 time limit for identification is OK, there should be no problem from the 1031 standpoint. If not the QI would notice and not proceed. For management reasons, often tenants are often told to pay a person or entity that is different than the owner of record, usually the property manager or property management company. Somewhere along the line, the management company would transfer funds to the owner so the owner will report the income. But if the LLC is a disregard entity, the transfer is not done, the profit is declared by the LLC, not the owner, there should be no issue as the income is declared and proper taxes paid. The owner and the PM in your case is the same. I assume this is so from what you describe.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Uzair Syed:

    @Ashish Acharya Would love for you to chime in if able

    Thanks all so far

    Reassuring as it seems we can still preserve the 1031

    You need to report the old property in the personal return and also report the replacement property in the personal return. LLC doesn't even own the asset so reporting in the LLC's return is outright wrong.

    If the property was reported under LLC, you might want to talk to your tax advisor on how to correct that and move the property over to personal return so that your 1031 is respected by IRS.

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  • Uzair Syed
    OP
    Member since 2019 · 10 posts · 4 votes
    5y

    Yes the tenants deposited rent into bank account of the LLC (for past 5 years; prior yo that was to parents account).

    Ownership seems to be the key.

    Yes the LLC was taxpayer but LLC didn't own the relinquished or replacement property.

    Will touch base with their QI today, and probably need to involve a CPA who is familiar with 1031. @Ashish Acharya, do you do taxes outside of GA?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Uzair Syed, Ashish is a rock star CPA.

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  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    Based on the facts, the IRS could make the argument that the property was beneficially owned by the LLC. However, the fact that it was titled in the name of your parents, presumably directly with joint ownership, does work in their favor although it's not dispositive.

    It's advisable to fully explore the situation with a tax professional to iron out any potential strikes against your parents, such as evidence of a beneficial ownership agreement or contract as well as where the sales proceeds were deposited, and to make sure the final partnership return and accounting are prepared correctly.  The risks also need to be fully explained and explored.

    At a high level, we look at who received the benefits and burdens of the sale in this situation.

    1Reply
  • Uzair Syed
    OP
    Member since 2019 · 10 posts · 4 votes
    5y

    Thank you for your insight.

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Uzair Syed

    This is one of the issues I see when taxpayers create LLC's but don't transfer title, mortgage documents, insurance documents to the proper entity.

    Just because you have an LLC and start collecting rents within the LLC make it correct.

    It appears that the prior year returns were filed incorrectly.

    The cleanest approach is likely to file a final Partnership tax return to report the transfer + distribution.

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