Strategy Options for 1031 Exchange to Husband/Wife LLC

[Alex P.]

First time posting to the BP forum. Have to send a big THANK YOU to all of the folks sharing their experiences and information in this community. Very much appreciated.

I am in the middle of a 1031 exchange, having just sold a SFH rental in California and now closing in on identifying the replacement (leveraged multi unit commercial) property in Indiana, with the funds being held with a QI.

The relinquished property title was held only in my name, as I purchased it before marriage. Now married, I intend to hold the title of the new property in the name of the LLC that my wife and I will form for it.

As I understand it, single member LLCs are considered disregarded pass through entities. And LLCs owned by a husband and wife in community property states (like CA) can be considered disregarded entities. But LLCs in non-community property states (like IN) are treated like partnerships.

Aside from consulting with a CPA and real estate lawyer, I was wondering if anyone in the community has advice on best strategy here? The answer might be obvious to some, but I'm still trying to answer the following questions:

1. If my wife is to be on the title, do we have to form the LLC in CA rather than IN so as to keep the disregarded pass through status to succeed with the 1031 exchange?
2. Should I purchase the replacement property in my name and transfer title to LLC at a later date? I believe there are potential issues to sort out with the lender.
3. Should I purchase the replacement property with new sole member LLC, then add my wife to the LLC later?

Thanks in advance for sharing your thoughts on this topic.

[Dave Foster]

@Alex P., my guess is that you and your wife together are already the "tax payer" for that property. The issues of household and property status are different from the issue of identifying the tax payer for a 1031 exchange. If you and your wife file a joint return then both of you are the tax payer for that property because all activity of that property is reported on the sched E filed by the two of you together. Both of you may go on title to the new property as well. An LLC that does not file a tax return and issue partnership returns and whose activity is also reported on your individual tax return would be treated the same for 1031 treatment.

It is the tax return where the property is reported that will determine who is the tax payer for 1031 treatment.