1031 Exchange

[Stephanie Zito]

Hi 

I am newbie and wanted to find out if you sell a residential property that is titled under an LLC can you use the 1031 exchange for capitol gains exemptions?

Kind Regards,

Stephanie

[Dave Foster]

DJ,,  As several have mentioned above - "intent to use for productive use in business, trade, or for investment" is the key to whether your exchange will be he held if examined.  

I think there is at least one alternative scenarios available to you depending on level of flexibility on your part that has been overlooked so far.

 Remember that intent and use when the property is purchase are the key to defending your exchange.  As several have said there is no statutory minimum holding period either before or after the exchange is accomplished.  There is only the question of intent.  And while intent can be satisfied in part by holding longer rather than shorter it is no longer the gold standard for qualification.

 If you have the ability to be patient about moving into the residence you buy with your 1031 you may still be able to accomplish your 1st scenario.  It's called a 121-1031 conversion and we do quite a few of them actually.

 The scenario runs like this - You sell a piece of qualifying (as determined by your intent and use of the property) and 1031 exchange to another piece of qualifying (as determined by your intent and use of the property).  After a period of time in qualified use you change your mind and "convert" the property to primary residence.  

Once this is accomplished then it becomes sec 121 property and the same primary residence tax free exclusion is available to you on this property as with any property with two additional requirements.  You not only have the standard requirement of having lived in the property for 2 out of the previous 5 years before you can sell and take the tax free exemption.  In addition to that, because the property was originally a product of a 1031 exchange you also have to recapture depreciation taken and have owned the property for a total of 5 years before you can sell it and take allowed profits tax free.

the beauty of this is that it turns tax deferred profit into tax free profit and does have the sanction of being addressed in IRS Rev. Proc 2005 - 14 and further codified in  Rev Proc. 2007 - 12.  What is difficult is that it requires you to delay moving in to the property immediately.  And it doesn't specify how long you have to wait to do so.  Conservative thinkers will feel comfortable using the term two years.  Conventional wisdom has long chanted the mantra "one year and one day" (but for very different reasons than you might think.  The reality is that no one really knows for sure because intent and use are the key.  But longer is better than shorter.  It really comes down to what you and your legal and financial advisors feel comfortable with.

And it may not be right for you but patience can pay off.

Dave