From individual to 2-person ownership with DSCR loan

[Matthew Kirchmyer]

I'm selling a house in North Carolina and buying one with my friend in California. Both are SFR rentals so I want to do a 1031 exchange.

We are doing a "Dscr" loan and the banker said it needs to be bought in an LLC. So we started creating a multi-member California to buy it in.

But then I did some research on 1031's and looks like it needs to be single-member LLC because those are taxed as individual and therefore work when you "1031" into them from an individually owned property.

So I assume my friend and I need to do things differently. Possibly I need to buy in a single member LLC and we need to have a separate legal agreement between the two of us regarding the new house, so that in reality we split the burdens and benefits.

Would that be the best way to go? Do you see any other options?

[Dave Foster]

@Matthew Kirchmyer, if you want to do a 1031 then you have to purchase at least as much real estate as you sell.  and the tax payer for the new property has to be the same as the taxpayer for the old property.

DSCR requirements aside, you could purchase a larger property as tenants in common. However only the percentage you go on the deed for will count for your 1031 exchange. If your sale is $400K and your purchase is $800K then you could indeed go on deed with another person as tenants in common for 50% each and honor the 1031. Forming a new Multiple-member LLC is changing the taxpayer because a multiple-member LLC is a different taxpaying entity.

One thing to explore with the lender would be forming two single member LLCs taxed as sole proprietors to take title to the new property. A single member LLC that is taxed as a sole proprietor is the same taxpayer as the person.