1031 Exchange ----> Reinvesting in LLC

[Bryan Beal]

Say someone wants to sell off some SFR properties they currently own (individually) and take the proceeds as a 1031 Exchange and invest into a LLC that is going to invest in single family real estate. Under what circumstances would someone be able to do this? Are there any? Any help is greatly appreciated!

[Dave Foster]

@Bryan Beal, Because your are the tax payer for the old properties you also have to be the tax payer for the new properties.  Surprisingly the deed does not necessarily indicate who the actual tax payer is.  The taxpayer is going to be the tax return that reports the activity of the property.  Your properties are probably reported on your schedule E so that makes you (or rather your tax return) the tax payer.  So the replacement properties must also have you as the tax payer.  And that is where @Michael Plaks suggestion comes in.  You have a couple of options

1. If you have an LLC that only has one member, chooses to be taxed as a sole proprietor, and does not file it's own tax return is what is called a "disregarded entity". All the properties owned by this LLC will be reported on your individual tax return since the LLC does not file it's own. So if you sell as yourself you could buy as a disregarded LLC in a 1031. That's what Michael is saying. I always recommend that you make the deeds match as closely as possible because an inexperienced field agent who audits your return can easily be confused and cause you grief. But it is legally acceptable.

2. You can also complete the exchange selling as yourself and buying as yourself and then contributing the properties into the LLC. This has a few benefits. 1. It's text book adherence to the 1031 regs as deeds and taxpayer both match. 2. You will find certain types of financing easier to obtain as an individual. 3. You can take whatever time you want to structure your business just as you want.

3. another option that is rarer but also works is if the properties you want to purchase are in an LLC that is single member/single asset (meaning one owner and the LLC only owns one asset). In this event it is also permissable to purchase the membership interest of the LLC itself rather than actually purchasing the property from the LLC. This can avoid a second real estate closing. It gives you a free LLC with each property. and the LLC also has a seasoned history. This is one reason why some investors will have a separate LLC for each property they own.