1031 and renting from own LLC help needed

[Ivan Smith]

I have a question in regards to us getting a property and doing it correctly. We are actually closing on it this week and were under impression that we cud put the house into our llc and rent from the llc. then potentially rent it out or sell it, or sell it to ourselves and turn it into personal home. We are in a time crunch as 1031 property identify period is ending and we are loosing our current lease we live in.

We sold a problem property and would see about 120k profit, so because sales tax would be significant we are doing 1031 exchange and putting the proceeds into this property then adding cash and buying it under LLC.

Idea was to rent it for a year or 2 then do smth else with it. Talked to 2 cpas both say we can't do it and it will probably get audited as it will be in fact our personal residence. If we get audited then we would have to unwind 1031 and pay a bunch of fees and penalties on top of taxes

If someone knows of a legal and correct way of doing this and still be in compliance with tax rules etc please advice asap. Thank you.

[Dave Foster]

@Ivan Smith, the Nay's have it. My guess is your LLC is a disregarded entity. That means that in the eyes of the IRS you and the LLC are the same entity. Your QI should have picked up on this. Because if your old property was in the LLC you would have the option of then purchasing in the LLC or purchasing as yourself. Same difference if it is a disregarded entity. And that would have you renting from yourself after using a 1031 which is only for investment - renting your primary residence from yourself after doing a 1031 and agreeing to use the property for investment isn't going to make the IRS very happy.

If the LLC is a regarded entity and files it's own tax return. then it is a different tax payer and you might (emphasis on might since its still a related party) be able to rent from the LLC. But if that's the case and you sold the property in your name you cannot buy it in the name of a regarded LLC.

The way to legally do this would be to complete a property 1031 exchange.  Sell and buy as the same tax payer.  Use the property for investment for a year or so.  Then if you want, convert it to your primary residence.  That satisfies the 1031 requirements.  And converting a property from investment intent to primary residence is fine.  As long as your initial intent was to hold for investment.