Double Closing (Unique Situation, Maybe?)

[Account Closed]

Good Morning,

I am looking for advice on something. I turned a primary home into a rental last year as a way to jump back into the REI game. Since then, I was laid off, found a new job, and I have relocated from McKinney, TX to Charlotte, NC. During the relocation, I sold what was my new primary residence on January 31, and I still have my rental. So here is my question, I have been using my LLC to manage the property, and my tenant has shown interest in purchasing the property. Now, is there a way I can double close on the house when he goes to purchase? The double close would be selling it to my LLC and then selling it to the Tenant? My reason for this is to protect the profit from the IRS, as I would like to use the money to purchase a SFR in North Carolina under my LLC's name. Is this necessary, or will I be robbing Peter to pay Paul? I just don't want to get taken to the cleaners when it comes to taxes. Any assistance would be helpful. Thanks!

[Bill Exeter]

Hi Jonathan,

First, how long have you owned the subject property? How long did you live in the property as your primary residence before you converted it to rental property? If you have owned and lived in the property for at least a total of 24 months out of the last 60 months (2 years out of the last 5 years), then you qualify for the 121 Exclusion and can exclude up to $250,000 in gain if you are single or $500,000 in gain if you are married from the sale of the property. You might want to discuss this option with your accountant because you might qualify for a prorated exclusion due to your relocation (getting laid off and relocating will likely qualify).

Second, I'm assuming that you (or you and your wife) own the LLC, so the double closing would be essentially selling the property to yourself and would not provide any tax advantages. And, the LLC is a pass-thru entity, so it will not provide you with any ability to shelter the gain as any gain would "pass-thru" to your individual income tax return.

Third, if the sale of your rental property does not qualify for the 121 Exclusion discussed above, then you will likely need to look at a 1031 Exchange so that you can trade out of rental property and into other rental property on a tax-deferred basis.