Transfer property to a LLC (2 foreign owners) to avoid FIRPTA?

Question

Hi BiggerPockets,

My husband and I are foreign owners of a condo in Florida that we want to sell to buy other investment properties.

We didn't form a LLC at the time of buying. Now we're told that we should have in order to avoid FIRPTA (15% withholding for foreign investors) since FIRPTA doesn't apply to a domestic LLC that has multiple members (foreign or domestic).

Is it too late to create the LLC now and then transfer the property into the LLC through a quit claim deed before the sell? Or will it look suspicious to the IRS?

If it's doable will there by any consequences in terms of taxation for us, the LLC owners? As a "partnership" will each owner be taxed on future rental income? Or as spouses can we elect to file as a qualified joint venture after the sell?

The idea is to first avoid FIRPTA by being treated as partnership but then later become a "joint venture" for long term taxation purposes.

Thanks for your help!

Cameron Skinner · Answer

@Mylene Bel, The IRS publications state if you are a non-resident alien and have any US source income you are normally required to file a 1040NR, now there are some trade agreements with certain counties and other variables, but this is why I suggest a Tax expert who specializes in this type work.

Again, not knowing your specific tax situation Capital gains is usually 0% up to certain threshold amounts depending on several variables.  You are probably only looking at $300-$400 for a Tax expert to handle this transaction correctly from the beginning, but if you start trying to transfer the property or handle it incorrectly it may end up costing you several thousands after the fact to unravel a mistake.

Hope this helps Good Luck

Dave Foster · Answer

@Steven Hamilton II, Absolutely correct for the OP but I think we changed posters and the AP (this is starting to make me feel like Robin Williams in "Good Morning Vietnam") is really looking just at the issue of taxpayer and change of taxpayer close to sale.  In either case though, a change of taxpayer right before a sale is a red flag no?

Mylene Bel · Answer

I'm already talking with @DaveFoster and he has offered great advice! I was just wondering if selling as a LLC would simplify things by avoiding the 1031. But apparently not.

Mark Creason · Answer

Mylene,

You should talk to @Dave Foster.  He is a QI in Florida.  1031 exchanges are not really that complicated if you have the right team.

As for taxes, have you taken depreciation while owning.  Depreciation recapture is a 25% tax.

Mark

Steven Hamilton II · Answer

not necessarily. The holding period is usually considered the same.

Loren Clive · Answer

@mylene Bel I have seen clients successfully employ the LLC strategy you mention to avoid firpta here in Hawaii, vesting in the LLC literally days before flipping. Remember, the firpta is a withholding not a tax, therefore it's a question of having your money sooner vs later. Changing title once you're in escrow will delay loan funding, however.

I would consult a CPA regarding your specific situation.

Steven Hamilton II · Answer

The real first question is your residency status, how long have you been in the US? What is your Visa?

Dave Foster · Answer

@Cheyne De La Garza You could do it a couple of ways.  First of all, if the LLC is a disregarded entity ( it is sole member you and your wife  and doesn't file it's own tax return.  Then all activity of the property is recorded on your personal tax return already.  And a disregarded LLC does not change the tax payer in the IRS's eyes for purpose of the 1031.  It's moot and you can do what you want with regard to changing from self to LLC.

If your LLC is a regarded entity that is taxed as a partnership or s corp and files it's own taxes and you wanted to quit claim it from your names into an LLC before you sell then I would strongly caution you against doing that any time within at least a year before you sell.  In this event you are changing the tax payer for the property and when done prior to a sale the IRS has consistently ruled that as a way of accessing profit inappropriately and disallowed the exchange.  But if you do it significantly before you list and sell it could be seen as part of your normal business practice.

The easiest way to do this would be for you and your wife to sell and buy and then after the fact contribute the property into the LLC.  This muddies the waters the least and by purchasing in your names you probably have access to more favorable financing.  Contributions into a different entity after completion of a 1031 are not viewed unfavorably.

You can always do 1031s.  It's just that the tax payer for the relinquished property must match the tax payer for the replacement property.  If you want to change tax payer do it after you complete the next 1031.

Cheyne De La Garza · Answer

@Dave

@Dave Fosterundefined

Cheyne De La Garza · Answer

Dave,

My current rental property which belonged to a 1031 exchange is under my wife and my personal name, am I allowed to quticlaim it to my LLC and keep doing 1031's through the LLC?

Cheyne

Hawaii

Transfer property to a LLC (2 foreign owners) to avoid FIRPTA?

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