Property transfer to LLC/ tax treatment

[Jackie Riley]

Hello –

I'm looking for confirmation of understanding/ advice relating to transferring property into LLC and treatment from a tax perspective

My parents completed a 1031 exchange over 2 years in their own names – they file a joint tax return. We'd like to transfer their interests to an LLC – however, we do not wish to be treated as a partnership for federal tax purposes. It seems that if my parents transfer the property to a LLC in which each owns a 50% interest, the default federal tax classification would be a partnership if we do not live in a community property state and the property is not located in a community property state? We live, and the property is located, in NJ, which based on my research is not a community property state. Would appreciate some advice on this. Our CPA told us if we transferred to NJ LLC with both of my parents as 50/50 owners, they can treat the LLC as a single member for federal tax purposes and continue to file on Schedule E because they file a joint return, but this seems to be inconsistent with what I've read.

If we want to transfer to an LLC and continue reporting on Schedule E on their joint tax return, can I simply set up the LLC with one of my parents as the member and have each parent deed their interest to the LLC that will be owned by one parent? I think there is a deemed sale from one parent to another but since they are husband and wife filing joint return, I don't think there are tax ramifications but would appreciate thoughts/ advice here. We'd prefer to not deed their interests to 2 separate SMLLCs as this creates complexities with having to maintain multiple bank accounts, etc.

Note that at some point in the future we'd like to complete a 1031 but in the name of LLC instead of their names.

Thanks in advance for advice/ input.  I've also posted in QI/ 1031 Exchange Forum as well.

Jackie