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

[Jon Holdman]

Lets ask @Bill Exeter and @Steven Hamilton II for input, but I'll give mine.

No, spec build are not elgible for 1031 because they're ordinary income, not investments.

If you have an LLC you own sell you a house it will have zero effect on taxes. An expense on one side of the deal is income on the other side and both sides end up on your tax return.

[Bill Walston]

@Jon Holdman is spot on. Inventory, or stock in trade, is specifically excluded from Section 1031 treatment.

[Drew Dim]

Thank you both

@Jon Holdman and @Bill Walston The cost is approx. $225k to build + land (which I own out right). So if my llc sold me the house for $225k it is worth approx. $425k. This isnt speculation, I personally know the builder selling these exact houses in the same subdivision for this. These builds would be the comps for my 3rd house. In 2yrs + these houses could very well be in the upper $480-90s realistically to even over $500k. This is why I want to protect the instant $200k from taxes as I would buy the house for cost.

So llc builds the house, i buy and its a complete wash. No profit as it covered cost, is this beneficial at all?

I need the llc so I can have a business banking account for the investors to deposit the $ too. Do y'all have any other suggestions?

[Drew Dim]

additionally, not sure if this helps....

I've owned the land for over a year, demoed a house on it and will divide and build 3 houses. That meets the rule of thumb of buy and hold for a year and the improvements just happens to be an entire house rather then a fixer upper.

Not trying to "cheat the system" or bend any rules, but just curious

[Ned Carey]

In order for the home to qualify for the capital gains exemption you must live in it for at least 2 years (or is it 3).

[Tom V.]

At this point you will have to live in it for at least 5 years to get the full exclusion. Consult a CPA.

[Drew Dim]

my understanding is it's still 2yrs. And as stated that the plan for the 3rd house. Its getting it from the llc to me personally. Basically I'm buying a house for cost with the true retail value being almost double what I would buy it from. You cant sell a house to family for a $1, so does that "rule" follow to this example?

[Ian Love]

In order to qualify for the 250,000 exemption, you must live in the home for 2 of the last 5 years as your personal residence.

[Steven Hamilton II]

Originally posted by @Drew Dim:

my understanding is it's still 2yrs. And as stated that the plan for the 3rd house. Its getting it from the llc to me personally. Basically I'm buying a house for cost with the true retail value being almost double what I would buy it from. You cant sell a house to family for a $1, so does that "rule" follow to this example?

How long have you held the land? And you stated there was a property on it before? What was it used for? Was it demoed immediately after acquisition? You may be able to justify a 1031 depending upon exact details. It does not sound like you are in the business of doing this; however, what are your other sources of income? Have you ever invested in RE before? If so how?

You will not be able to 1031 the funds into the building of the new property as you already own the land, this is true even if you transfer it to a new entity.

This would be better fit for a phone conversation to asses details.

The only options I truly see to you are possible long term capital gains dependent upon the nature of the original transaction/property purchased.

I think as you talk about it, you'd get hammered in an audit.

I can picture a few options.

[Bill Walston]

@Drew Dim , in your OP you specifically asked "do spec homes qualify for 1031?" Both @Jon Holdman and I answered that question. The you come back with "this isn't speculation." So I suggest that you follow the advice of @Steven Hamilton II and get with a tax pro, tell him or her exactly what you plan to do, and let him or her explain your options.

[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.

[Drew Dim]

thank you all for all of the advice.

Wish 1031 would have been an option but glad I asked.

Thanks again!

Drew