Can someone sell a rental property quit claimed to an LLC, while mortgage is in personal name? Would it be necessary to transfer back to personal name? Does it complicate matters when planning to do a 1031 exchange?
When doing the exchange you will need the relinquished and replacement property titled the same. I did this a couple years ago - mortgage in personal name, but titled in LLC, the LLC is used for all of the income and depreciation so the replacement property needs to be titled the same. I am not a CPA, Attorney or qualified to respond to this post, but did a reverse exchange exactly how you describe.
Any reasonably qualified 1031 company or CPA should be able to walk you though this.
Your bigger challenge could be taking title in the LLC for the new purchase, unless working with a local bank who will allow it - like Firstbank.
Yes, you can sell any property you own. If there is a mortgage attached to the property there's a 99.99999% chance there's a clause in the mortgage that requires it be paid off when you sell - regardless if it's in your personal name or an LC.
Yes, it does complicate things when doing 1031 - but not really... there are rules you have to follow to stay in compliance with 1031. The starting point is to find and hire a qualified intermediary to guide you through the process.
Travis, thank you for the name of bank. I have had a heck of a time trying to finance through LLC and finally gave up so that's why mortgage in personal name. I will contact Firstbank when the time comes.
Thank you Blair for the information. I will have to ask about the exchange regarding one property being a long term rental and the property to be purchased would be a short term rental property (we would not stay there more than 14 days and is available to rent 365 days in year but less than 30 day stays), if that would qualify.
@Gelerie S., The real risk you've been running is that the quit claim into the LLC could have triggered a due on sale clause in the loan unless the lender gave you permission. But you've dodged that bullet so now your almost home free. The loan is attached to the property so regardless who is on deed it will be paid off as part of the closing. No problems here at all.
But from the 1031 perspective.
1. It is very risky to transfer title to a property right before a sale. The IRS has consistently shown that it is suspicious of deed transfers immediately prior to a sale. The tax payer for the old property has to be the tax payer for the new property and any transfer right before sale that changes tax payers is looked at very suspiciously. You don't have to do it. Simply sell as the LLC and buy as the LLC in your 1031 exchange. If you want to change taxpayers after the 1031 is complete then it doesn't impact the 1031 at all.
2. The exception to this could be if your LLC is a disregarded entity. If the LLC is a single member LLC that chooses to be taxed as a sold proprietor (meaning it doesn't file it's own tax return and all activity of the property is reported on your personal tax return) the the IRS still views you as the tax payer for the property regardless that the LLC is the deed holder. In this event it is technically OK for you to sell as the LLC and buy as yourself. We would always recommend that the names on deed match as closely as possible because that avoids questions. But you may have some flexibility if getting financing for the LLC is an issue as @Travis Sperr mentioned.
3. Going from a long term rental to a short term rental is absolutely fine. Property that qualifies for 1031 is property you purchased with the intent of holding for productive use in investment. the type of investment real estate does not matter. So going from residential to commercial or long term to short term rentals is perfectly fine.
Dave, thank you for that info. It was strange because one company 1031 intermediary I called said absolutely could not do long term to short term exchange of property. So it is reassuring that I can. The LLC does have own tax return.
@Gelerie S. Yep don't know how to sugar coat that one.They're wrong.
What your describing is a very common interim strategy to retirement. The investor exchanges a LTR for a really nice vacation rental that they also use some for personal use (You've already hit on that possibility I see). When it's time for retirement they then move into the vacation rental full time and convert it into their retirement residence. After a few years go buy they then sell that rental property now converted. they get a proration of the gain tax free and move into their next transitional retirement house.
@Dave Foster haha. I’m glad that they are wrong. That is an interesting idea to make it eventually a retirement home.