Changing Ownership of 1031 exchange

[Danielle Morton]

So my parents did a 1031 exchange almost 5 years ago and bought a beach home which we rent out. Me and my brother have been managing the property and my parents consider us owners in this. My question is, can this property be made into an LLC with my parents having 25% each (50%) and my brother and me having 25% each or can we be added to the deed as co-owners? We are adult children with our own families for some background. Thanks!

[Dave Foster]

@Danielle Morton, It can be done. There's some issues that you'l have to watch out for. In general contributions into and distributions out os an LLC are not taxable events. The consideration for the contribution of the property is membership interest. It's very common to take a post 1031 property and contribute it into an LLC.

Where it could get thorny is how the other members of the family take their membership interests.  What is the capital that they bring?  without consideration to exchange for the membership interest it is very possible that this could look like a deemed sale at least partially.  And then you get into issues of gifting and lifetime exemptions.  So work with your accountant.

But.. the deferred tax will not go away. It will pass into the LLC>. So one thought would be for your parents to retain title (either as themselves or as a single member LLC). If they pass away while owning that property then the property goes to the heirs at a step up in basis and the deferred tax goes away. So in exchange for not being on title you inherit the property tax free.