1031 Exchange into a LLC

4 Replies

HI, We are trying to 1031 a single family rental currently in our own names (husband/wife) to a multiplex under a LLC with both our names on the LLC. We are getting conflicting advice from attorney and 1031 specialist. 1031 specialist says we must buy and sell under same tax ID. If we get a LLC we will have a new EIN number. Seems like we will have to buy the property under our own names then wait 2 yrs to transfer it to a LLC. Are there any CPAs out there who could give me their advice. Seems like this shouldn't be that hard?

@Marysue Connelly , The 1031 specialist you spoke to may have not had the entire picture.

The regulations of 1031 require that the tax payer for the old property be the same as the tax payer for the new property.  Tax payer is defined as the entity that reports the activity of the property on it's tax return. Right now you and your husband probably file a joint return and both of you are the tax payer for the property or rather the ssn that is used as the primary number for that joint return is the tax payer.  So that is the entity that must be the tax payer for the new property.

But here's where the other specialist may have gotten it wrong or misunderstood you. If you set up an LLC with only you and your husband as members (a single member by virtue of your joint tax return) and that LLC chooses to be taxed as a sole proprietor then it is what would be called a disregarded entity. Even though that LLC may be on title you are still the tax payer for the property because all activity of that property goes on the schedule E of your tax return.

In that instance you are technically still the tax payer for the property. So you could sell the property as yourselves and buy as the disregarded LLC.

We would always still recommend that the deeds match as much as possible because that is how to avoid questions rather than have to answer them. And the other reason for keeping it in your name is financing as LLC financing can be either more expensive or tricky if your LLC is unseasoned.

A better answer might be to sell as yourself, buy as yourself, and then contribute into the new LLC. contributions into an LLC are generally not taxable events. There is no statutory 1031 reason that would make you wait 2 years after completing your 1031 to contribute to the LLC. Again, the 1031 specialist may have misunderstood. If you were going to contribute the old property into the LLC and then sell and 1031 you'd want to wait more than a year. But that same situation does not apply when contributing a property into an entity after a 1031 exchange is complete.

thanks Dave!!! I have heard the term disregarded entity before. Our 1031 specialist (same company as you) wanted us to do that. The atty said we can't set up a LLC without an EIN and that is when our 1031 specialist suggested with speak with our tax specialist. Who I have now heard from and he says we can't do it. Sounds like you disagree. If I'm reading this right. I can't believe this isn't done more often.

@Marysue Connelly , without treading too far down the tax advice path I'll just say that there are a few gajillion disregarded LLC entities operating in the United States right now. Your schedule E tells the story.

Could your tax specialist have been referring to some state issue and community property?  If so that might impact from a state perspective but not technically federal.

An LLC that only has one member (the joint return of a husband and wife) and elects to be taxed as a sole proprietor, is a disregarded entity and the IRS views the joint return as the true tax payer for property owned by that LLC from a 1031 persepctive. From the IRS.gov web site -

An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. ... A single-member LLC that is a disregarded entity that does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes.

Dave-

I just read through your answer to Marysue and we want to do a similar move. We sold in CA and bought in AZ but live in CO. Our son will be moving to AZ. We are interested in putting the AZ rental into an LLC so that my son can manage it (for residency). From your last comment that may not be possible? No employees? Can he be an independent contractor?