Quitclaim deed from personal name to LLC after completing a 1031 exchange

[James Bakun]

Hey All! My friend is interested in doing a 1031 exchange with an investment property. Both him and his wife currently own the property in their personal names and plan to maintain that ownership structure when selling the relinquished property and purchasing the replacement property. This avoids any complications with the 1031 exchange.

However, after the exchange, they want to transfer from personal name to an LLC under their Holding Company to protect their assets. It appears the IRS may withhold tax deferral if ownership changes immediately after the exchange. I noticed some 1031 intermediaries have stated there is no legal requirement for "time limit" after the exchange is complete to quit claim to an LLC, but some recommend holding it in the same title for "some time."

Does the IRS ultimately look at the investors' intent when they quitclaim right away?  In this scenario, both are transferring from personal names to their Holding Company for asset protection, indicating good intent. Since they both will own the Holding Company, it will technically remain the same "taxpayers."

Any advice or concerns on how to approach this? 

[Dave Foster]

@James Bakun, they can do this very easily by using a disregarded LLC. A disregarded LLC is a single-member LLC (or husband/wife LLC in a community property state) that elects to be taxed as a sole proprietor. This means that the LLC will not file its own tax return. So the activity of the property will still be reported on their personal tax return where it is now.

That is the important consideration.  Not so much how the property is deeded.  But what tax return reports the activity of the property.   Their situation is complicated since they each file a tax return that reports 50% of the property.  so they are both taxpayers.  If they sell as themselves and buy as two disregarded LLCs (one for each of them).   That doesn't cause issues at all.

However, if they sell as themselves they cannot buy as one LLC right now because there are two tax payers. And that would make it a multi-member LLC which has to file a tax return. That will require their accountant's blessing. But still should not be a problem since contributions into and distributions out of an LLC are generally not a taxable event.