Starting a 1031 --- one question:

[David Smith]

My wife and I own a property. We plan to do 1031. My plan: we form an LLC. We sell the property to the LLC. Then LLC do the whole 1031 -- sell and buy another property, so that we can use llc to protect the replacement property.
Is it allowed from IRS rules? Thanks.

[Dave Foster]

@David Smith, The IRS does not like transfers of property right before a sale. So your plan to put the property into the LLC and then sell and buy is problematic for a couple of reasons:

1. The IRS always views entity transfers like that as an opportunity to basis shift or a potential step transaction - either deliberately or accidental.  But either way they can very easily disallow simply on the suspicion that it was deliberate.

2. The whole premise of a 1031 is that you are selling property you acquired with the intent of holding for productive use. While there is no statutory holding period , there is an underlying assumption that you did not purchase the property primarily for resale. That's the problem. If you transfer the property to the LLC and then the LLC tries to do an exchange - Did the LLC acquire the property to hold or for resale. So it puts the entire exchange intent at risk.

3. I don't know you'll be getting financing for your purchase, but unless your LLC is seasoned and a going concern you'll have a very tough time getting a lender to make a loan to the LLC. They will want it in your name which will defeat the entire purpose of your entity transfer.

So I would never recommend that you transfer title right before (at least in the same year) a sale.  However here's a couple options that might work for you.

1. If the LLC you are forming is a disregarded entity (meaning only one member, not filing a tax return, choosing to be taxed as a sole proprietor) then the IRS looks past the LLC and sees you as the tax payer regardless of who is on deed. In that event selling as yourself and buying as the LLC does not change the taxpayer and would be allowable. I still counsel that you try to keep the deed as close to the same on sale and purchase as possible to avoid even any questions.

2. It would be far better to sell as yourself and then buy as yourself. Then when the 1031 is complete transfer the property later into the LLC. This satisfies the 1031 and possibly is more palatable to your lender.