transfer property into LLC before or after 1031?

[Dal K.]

My wife is selling land titled in her name, we want to 1031 the proceeds into a multifamily and own it through an LLC for liability protection. We know the 1031 relinquished and replacement properties must be titled to the same taxpayer, so the question is whether we should retitle the land to a new LLC before closing the sale to relinquish, or if we should 1031 in her name and transfer to the LLC after closing the replacement sale. Seems like it would be best protection to retitle to LLC before relinquishing?

Second question: if we transfer the land into the LLC first, is there a required waiting period before we can do a 1031 relinquish; or if we 1031 the personally-owned land into the multifamily first, is there a a required waiting period before we can transfer the multifamily replacement into an LLC?

[Dave Foster]

@Dal K., a lot depends on the type of LLC you're wanting to use. for 1031 purposes you and your wife are the same taxpayer if you file a joint tax return. Because it is really the tax return that reports the rental activity that is the entity that will do the exchange.

So, if you're thinking to use a single member LLC (you and your wife) that will be taxed as a sole proprietor the activity of the property will still be reported on your tax return so whether or not the property is titled in your wife's name or the name of the LLC it will still be you and your wife's tax return that is the taxpayer. So strictly it doesn't matter if you contribute it to the lLC right before sale or right after purchase. You're not changing the tax payer.

Now, that being said it's a whole different ball game if you're setting up an LLC that will have it's own ein, be taxed as a partnership, and have to file it's own tax return. In that event it would be a different tax payer and have to be treated much differently.

Given that you can go either way, I'd usually recommend that you do the 1031 first so that there is even no question of holding period or a potential change of taxpayer to the LLC. But that is mainly optics. Your attorney may prefer to do transfer deed first due to liability concerns.