1031 exchange question

[Sean Mcevoy]

I have a 3 unit investment property in PA I am looking to sell and 1031 into a 6 unit property. The 3 unit is in mine and my wifes name and we want to buy the 6 unit in an LLC. I was told I can't buy in an LLC if the first property is in my personal name. What options do I have?

[Dave Foster]

@Nick Maugeri, you are absolutely right about @Sean Mcevoy needing to confirm with a QI on the 1031 to verify!  As luck would have it I am @Bill B.'s qi.  And I do confess I told him exactly that (although he already had it figured out :).  

The IRS looks to see what tax return reports the activity of the property. Sean, for you that is your personal 1040 (I assume you and your wife file jointly). To make the taxpayer match for your replacement property it too will need to be reported on your personal tax return. That is the issue with an LLC. A multi-member LLC has to be taxed as a partnership. This means that it has to file it's own tax return. So it is a different taxpayer. It changes the tax return reporting the property.

In a community property state, a husband/wife LLC that elects to be taxed as a sole proprietor will not file a tax return. So that would be fine. But you don't live in a community property state. So the options for you like Bill said are

1. Use two "disregarded" single member LLCs (one for you and one for your wife) to own the property.

2. Purchase as yourself and either carry an umbrella policy or quit claim into an LLC after the 1031 is complete.

Not an easy question is it?!  That's why NIck encouraged you to get it straight from your QI.  Deep waters 1031 question!!