1031 Exchange into a LLC

[Marysue Connelly]

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?

[Dave Foster]

@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.