What happens to your LLCs after using a 1013 Exchange for a trade-up??

Question

Let's say you own three rental properties, and each property has its own LLC. What happens to the LLCs if you decide to trade the rental homes for an apartment building using a 1031 Exchange?  Are the LLCs not under your control anymore or do you still have to dissolve them after the trade? Any clarification would be greatly appreciated.

Russell Brazil · Answer

The person/entity selling the old property, in your case the LLC, needs to be the same person/entity buying the new property. Remember, if XYZ LLC sells the property, they are ethe owner. You are not the owner. Joe cant sell a property and 1031 and Fred by the new property. Has to be Joe to Joe, and XYZ LLC to XYZ LLC.

Mohammed Milord · Answer

@Dave Foster Thank you so much for explaining all of that and breaking it down! I really appreciate it!

Dave Foster · Answer

@Mohammed Milord, a 'disregarded LLC' is an LLC that only has one member and has elected to be taxed as a sole proprietor.  This means it doesn't file it's own tax return.  All of the activity of the property is reported on the tax return of the person or entity that is the member of the LLC.

You own an LLC.  You are the only member.  It has elected to be taxed as a sole proprietor.  It does not file a tax return.  All activity of the property is reported on your personal tax return.  The LLC is disregarded to you - The IRS considers you to be the taxpayer for the property even though it is deeded to the LLC.

Same situation if there is a parent LLC that is the sole member of several junior (or series LLCs ).  If those  LLCs do not file their own tax return then all activity is reported on the tax return by the parent LLC.  The junior LLCs are disregarded and the IRS considers the parent LLC to be the tax payer for the properties owned by the junior LLCs.

In both of those cases the LLCs are selling the property because they are the deeded owners.  But the tax payer is you (or the parent LLC in the example).  So you can sell the property as the LLCs and purchase in another LLC that is also disregarded.

The 1031 can be done by any tax paying entity.  That is not an issue.  And you sell disregarded LLCs the same way you sell any LLC - Either the LLC sells the property in which case you still own the LLC.  Or the member who owns the LLC sells the LLC which means that the LLC still owns the property and someone else is now the member (owner) of the LLC>

Dave Foster · Answer

@Mohammed Milord, like @Mark H. Porter said, if the LLCs are all disregarded to the same entity then it is no problem at all.  Sell as three disregarded LLCS and buy as one new LLC that is also disregarded or as any one of the other three LLCs.

Dave Foster · Answer

@Mohammed Milord, The taxpayer for the old property has to be the same taxpayer for the new property.  If your LLCs file tax returns then they are the tax payer for your properties.  You must sell as the LLC and buy as the LLC.  Selling a property does not mean you lose the LLC.  It just means that your LLC sold an asset.

If your LLCs are single member LLCs that do not file a tax return then all activity of the properties are reported on your personal tax return.  In that event you are the actual tax payer.  So you can sell as the LLC and buy as yourself or another LLC that is "disregarded" like the other.

Either way you do not lose the LLC.  The LLC sells an asset.

Mohammed Milord · Answer

@Dave Foster I'm confused. How can an LLCs be disregarded?  How do you sell disregarded LLCs? Do you have to create separate LLCs for all of your properties before the trade-up?

Mark H. Porter · Answer

I have done this many times.  If the downleg and upleg LLC’s are disregarded, in other words, they just get reported on your schedule E and don’t file separate tax returns in the LLC names, then it all rolls back to your SSN anyways.

I’ve had three properties, with two separate disregarded LLC’s, roll to two properties using a completely different, disregarded, LLC.

Mohammed Milord · Answer

@Dave Foster Can all three rental properties be under one LLC by the time of the trade-up? Is that wise?

What happens to your LLCs after using a 1013 Exchange for a trade-up??

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