Exchanging 1 multi-family for 2?

Question

Bill Exeter · Answer

Hi @Bob McKee,

The 1031 Exchange can absolutely involve the sale of one Relinquished Property and the purchase of more than one Replacement Property. It can involve one or more Relinquished Properties in one or more Replacement Properties. The more properties involved the more complicated your 1031 Exchange transaction would be, but multi-property exchanges are very common.

Be acquired Replacement Property can also be mixed use property such as an apartment complex with a commercial unit. The only requirement is that your Relinquished Properties and your Replacement Properties be held for rental, investment or business use. The type of real estate does not matter as long as all of the properties are held for rental, investment or business use.

Your question regarding your setting up a limited liability company will depend on a number of factors. A single-member limited liability company is generally classified as a disregarded entity, which means that it exists for legal purposes but is ignored for income tax purposes. The underlying real estate owned by the single-member limited liability company is treated as if it is owned by the sole member for income tax purposes. You can transfer in or out of a single-member limited liability company at any time as long as it is considered a disregarded entity. LLCs that are not disregarded entities would pose certain risks if you made the transfer just prior to completing, or immediately after completing, a 1031 Exchange transaction.

Dave Foster · Answer

@Bob McKee

Any kind of investment real estate can be exchanged for any other kind of investment real estate.  Type, number, and price (as long as you are purchasing up if you want to avoid all tax) does not matter - Use does.  As long as you are using it for investment it qualifies for 1031.

When you do a 1031 the tax payer for the old property has to be the same as the tax payer for the new property.  Transfers right before sale are not smiled upon by the IRS.  So if you want to use and LLC to grow your portfolio you will want to sell this place, buy the next place in the 1031.  Immediately after the 1031 is complete you can contribute the new property into different entity with out triggering a tax consequence.

The exception to this is if your LLC is a disregarded entity meaning it is a single member entity and you have not elected for it to be taxed as a partnership or corporation and it does not file its own tax return.  All activity of the property will be reported on your Schedule E.  If this the the type of entity you want to set up then it would be permissable for you to sell as yourself and buy as that entity since you are technically the tax payer either way no matter what name actually goes on deed.

Bob McKee · Answer

I think I may have found the answer to one of my questions here: https://www.realwealthnetwork.com/learn/1031-exchange/how-to-do-a-1031-exchange-rules-definitions/. Specifically: When using a Starker Exchange doesn’t have to be a 1-1 exchange. For example, you can exchange one property for multiple replacement properties and vice versa: you can exchange multiple properties and for one larger property. As long as the new properties are like your original properties, you’re good to go. Do yourself a favor and get a good qualified intermediary to assist you.

Bob McKee · Answer

Here is a follow-up question. If I want to start an LLC to start doing my real estate investing (as opposed to in my name personally) should I do that before I sell current place and buy new one as exchange, after both transactions, or ideally in between? Thanks!