Question On Tax Implications

[Tim C.]

Hi guys looking to get some general advice on my situation.  I own 12 properties in cash in LLCs (disregarded entity so I file taxes in my own name not the LLCs) but am a foreigner so have only found 2 banks that can provide financing for me.  I'm looking to pull money out of these properties and the bank I am dealing with will only provide loans for new purchases not cash out refinancing.

I plan to sell the property from my LLC into my individual name (the bank will be none the wiser as they can't find the beneficial owner of the LLC). I am looking to understand the implications of this from a tax perspective. The property was purchased in Dec 2013 for $60k, $20k rehab fair market value is $130k.

Case A

if I sell the property to myself at $80k my understanding is:

i) zero capital gains tax (as cost base includes rehab so cost = $80k, sales is $80k)

ii) zero income tax

ii) whatever depreciation i claimed in 2014 I need to write back and pay 25% on

Case B

if I sell the property to myself at $120k my understanding is:

i) Capital gain of $120-$80k = $40k taxed at around 25%

ii) zero income tax

iii) whatever depreciation I claimed in 2014 I need to write back

UNLESS I do a 1031 exchange.  

The part I don't get is that given the LLCs are disregarded entities is, if I do a 1031 exchange and have effectively sold from LLC to myself and buy another property using 1031 am I still subject to deferring the capital gains tax?

It would be LLC sells to Tim, LLC buys another property.

Any comments appreciated I know it won't be formal tax advice!

Thanks

[Dave Foster]

Tim, 

I can't imagine a bank giving you a loan without looking at tax returns for the two previous years.  When they do so they will see the list of rentals held.  You will probably also be using income from these properties to document income.  There's a lot of string leading between those properties and you.  

You didn't mention this so may not even know it but one of the reasons that your accountant put teach of your properties is an what I am assuming is a domestic LLC is to proactively mitigate the impact of the FIRPTA Withholding. Since those properties are owned by domestic LLCs you need only provide documentation of such and when you sell and do 1031s on the properties you will not have to have the 10% FIRPTA withholding taken out.

You've started down a solid course of liability and tax mitigation.  probably better to find a private portfolio bank or lender that will work with you and your goals  rather than to try to start a relationship with a bank under false pretenses.