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

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

James Bakun
Member since 2023 · 7 posts · 0 votes

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? 

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y

@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.

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  • Account Closed
    Member since 2023 · 43 posts · 28 votes
    2y
    Quote from @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? 


    It is important to consult with a tax professional or attorney specializing in 1031 exchanges to ensure that your friend's specific situation and intentions comply with IRS regulations. While there is no strict time requirement for transferring ownership after a 1031 exchange, the IRS does consider the intent behind the transfer. In this scenario, where the transfer from personal names to the Holding Company is for asset protection purposes and both spouses will still be considered the same taxpayers, it may be considered acceptable. However, it is important to carefully document the reasons for the transfer and maintain proper documentation to support the exchange. Ultimately, seeking professional advice and guidance is recommended to ensure compliance with all legal and tax requirements.
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  • James Bakun
    OP
    Member since 2023 · 7 posts · 0 votes
    2y

    Thanks, Emma. I'll double-check with a tax professional to confirm.

    One more thing I overlooked... Currently, they file taxes separately, but they plan to file jointly after establishing the Holding Company. This may be an issue.

    Do they need to structure their Holding Company so it's owned by two disregarded LLCs, with each of them being the sole member? And should they still file taxes separately or can they file jointly? (Property is in Illinois)

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @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.

    The 1031 Investor5137 Reviews
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    1Reply
  • Nick Maugeri
    Real Estate Broker · Modesto, CA · Member since 2023 · 192 posts · 77 votes
    2y
    Quote from @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? 


    It's easier to purchase in the LLC. When you do a quitclaim deed, the lender can call the note due. The banks don't want to give you a low interest rate that might be higher if you closed with an LLC.

    For instance, in your own name you might qualify for a 7% interest rate and if you closed in the LLC it would be closer to 8.2%. You quit claim deed that and the bank wants the higher rate, they may call the note due. I ran into this fairly recently with Wells Fargo when purchasing in my name - they stated we had to do a refinance into the LLC and would not allow the quit claim. I'm not saying it's not possible - but it ought to be worth it.

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  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    2y

    My understanding of a 1031 Exchange is that you find a third-party administrator. It cannot be you or your wife. You agree to sell the property surrendering all ownership and control FOREVER. You then have a set time limit to locate a suitable replacement property that complies with IRS LKQ guidelines. For instance, you can't sell a house and buy a race car. Once the new property is located the third-party administrator will issue the funds for the purchase. Once that is accomplished you have a few other issues. 

    1. If there is a loan involved, you must have the mortgage companies' permission to transfer ownership. Tried to do this once and the bank charged me $250 to ask their lawyer about it and refused my request. Talk to your lender.

    2. The Garn St Germain Act allows transferring an owner occupied residence into a trust for Estate Planning purposes. An LLC is not a trust, so it looks like it would not apply here. Talk to an attorney.

    3. There are tax implications to consider. Talk to your CPA and the IRS. Get clarification in writing.

    4. Get a qualified 1031 exchange intermediary. The National Real Estate Investors Association has an agreement with David Gorenberg, JD CES at www.accruit.com [email protected]

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @George Skidis, the 1031 exchange is a bit different than you're describing.  It really is simply selling your old (relinquished) investment real estate and then buying new investment real estate (replacement property).  To do this you use the 3rd party qualified intermediary that you described.  You are not retaining your old property.  It is being sold.  And as part of that sale any loan is paid off. 

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  • Chris Weiler
    Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
    2y

    I would recommend transfering the property into a land trust with the beneficial interest going to them personally now, but changed into a newly created single-member LLC after the 1031 exchange. If you have or plan to have multiple rentals, I would recommend each property use the same structure above. Then create an S-corp to "manage" the properties. All interaction with tenants (including paying rents) and paying of contractors would be taken care of by the S-corp. In essence, the S-corp owns nothing but manages everything. If you're sued, you can "fire" the s-corp and create a new one to manage your properties. Having the S-corp also helps with "real estate professional" status and could potentially give you limited active income for specific write-offs and an ability to contribute to a retirement account.

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