Have your LLC sell a home to yourself for tax savings

[Drew Dim]

I have what seems to me to be a potentially complex question, som here goes:

I own a lot in my own name. This lot is actually 3 combined build able lots (yes it's all legal/permitable, etc so please don't get distracted by that). I have money lined up from friends etc and my other friend will be the builder. Profit margins etc look and are fantastic.

I want to set up an LLC, roll the property into this llc, build the 1st home with the $225,000 of lent money. Sell the home and 1031 the profits into the 2nd build.

FIRST QUESTION: due spec builds qualify for 1031? The land and everything was purchased and handled as an investment and I would hire the 3rd party to hold the money etc. but before any of this IS IT possible/legal????

Next, I would rinse and repeat for the 2nd house and for the final 3rd house.

It is on this house i would like my LLC to sell my personally the house (at cost) and 1031 and $$$ into a new project, live in the 3rd for 2yrs + and qualify for the capital gains exemption, which would/could be in the $300k margin.

Not sure if this is too complex OR even able to legally stand up against a tax audit.

Advice or a lead to someone who would know (lawyer/CPA w/ real estate exp) would be greatly appreciated!!!!

Thnx

Drew

[Bill Exeter]

There are a number of issues here.

First, your intent is to build and sell the property (not held for investment), so you would not qualify for 1031 Exchange treatment because you are holding the property as inventory in your development business and not holding the property for investment. The amount of time that you hold a property for is not the issue. The issue is your intent. The amount of time merely helps support (or not support) your intent to hold for either sale or investment.

Second, you want to 1031 Exchange into land that you already own. You can not 1031 Exchange into something that you already own. You must acquire property that you do not already own. Having said that, there are a number of Private Letter Rulings where they did allow the taxpayer to do that, but it gets much more complicated and there will be risks because all we have is Private Letter Rulings, which can not be relied upon by other taxpayers. In your case, it would still not qualify because your intent is to build and sell.

Third, selling yourself the house from your limited liability company does not do anything. You are selling/buying from yourself, so your cost basis, gain, etc., would not be affected. The service would collapse the transaction as a step transaction merely designed to avoid tax.