1031 Exchange Personal name to LLC

[Michael Dang]

Hello,

Did a search on BP but didn't see exactly an answer for this question.

My parents have a property under my dads personal name. We are doing a 1031 exchange on a property we are selling to purchase a retail plaza property. My parents have a trust setup with both of them as managing members. We would like to setup a new LLC with my parents trust as a member of the LLC. This new LLC would own or be titled with the retail plaza we're purchasing. There will be no financing or loan involved.

Is it allowable sell a personally owned property then use those funds to purchase a new property titled\owned by the LLC within a 1031exchange?

If not allowable, would you recommend purchasing the retail plaza under my dad's name then quit claim or deed it to the LLC?

Cheers,

Mike

[Bill Exeter]

Originally posted by @Dave Foster:

@Michael Dang

In order to successfully complete the 1031 exchange your father who is the owner of the relinquished property must also take title to the replacement property. Once that has been done it is possible to use a structure such as an LLC to become the owner of the new property, but only after the 1031 exchange is completed.

I am going to completely and strongly disagree with Dave here. 

The key is that your father is the current owner/investor/taxpayer of the relinquished property and as long as the replacement property is also acquired and owned by your father it will qualify for 1031 Exchange treatment. 

However, this does not necessarily mean that title absolutely has to be in his name upon closing on the purchase of the replacement property.  There are certain structures that will still qualify for tax-deferred exchange treatment as long as certain conditions are met.  The end result must be that your father (and mother assuming they file a joint income tax return) can treat this acquisition as acquired and owned by them. 

You are asking whether the replacement property to be acquired can be purchased by a limited liability company (LLC) that is owned by your parents trust. You have multiple layers here, so let me try to break it down for you.

The answer is: possibly, if certain conditions/structures are met.  Again, the key is that your father must be "treated" as acquiring the replacement property for income tax purposes.  This can be accomplished through the use of "disregarded" entities such as single member LLCs and fully revocable grantor trusts, etc.  A disregarded entity means that the entity is ignored for income tax purposes and the underlying owner is treated as if he/she owns the property/assets held in the entity.

So, in your proposed transaction, if the LLC that you set-up is owned 100%/solely by your parents trust, it would be considered a single member limited liability company and therefore a disregarded entity. The owner of the real estate would be considered to be the trust because it is the sole member of the LLC.

Taking it one step further, if your parents' trust which owns 100% of the single member LLC is a fully revocable grantor trust with your parents as the sole grantors, like most family living trusts are, the trust would also be considered a disregarded entity and therefore your parents would be considered the owners of the real property for income tax purposes and your transaction would qualify for tax-deferred exchange treatment.

You must be very careful when using disregarded entities and have your legal and tax advisors review the transaction to make absolutely sure that any entities involved, such as your LLC and trust, are considered to be disregarded entities in order to treat your father as the real owner of the acquired replacement property. If either of the two entities in the middle of this transaction are deemed not to be disregarded entities the tax-deferred exchange transaction would fail because the replacement property was not acquired by the same taxpayer.