Do I need a new CPA and a new LLC after 1031 in another state?

Question

My Cousin and I have LLC in California, and under the LLC we have a parcel of land. We registered the LLC in California and our CPA is in California as well. Both of us are not U.S. citizens or Greencard holders.

Due to some issues with the land, we decided to sell the land and to exchange for an apartment building in another state (we are looking at AZ, CO, FL, and TX, if that's necessary).

My question is: do I need to register a new LLC in the state where the building is located, then transfer the replacement property from California LLC to the new LLC? Also, can my CPA in California open a new LLC for us?

Michael Plaks · Answer

@Lea Hong

Here in America, we change LLCs every 3 years, and we change CPAs at least twice a year. It's just a cultural thing. :)

On a serious note, for a valid 1031 exchange, you must buy the new property under the same LLC, with very rare exceptions. Transferring to a new LLC after the exchange is unnecessary unless you have a specific reason to do so (such as quirks in asset protection or state fees). Your existing CA LLC will need to register in the state where you are buying anyway, and it can remain the owner.

There is no need to change CPAs unless yours is not doing a good job or not providing a good service. CPAs should never create LLCs anyway, it is a job for licensed attorneys. In fact, in many jurisdiction it is illegal for CPAs to form LLCs, known as practicing law without license.

If you plan a 1031 exchange, you need to hire a qualified intermediary such as @Dave Foster, and do it before you sell your land. But before doing any of that, consult a good accountant on whether an exchange is beneficial in your particular situation.

Eamonn McElroy · Answer

I can only assume the LLC is taxed as a partnership and not a C Corp as you didn't specify.

You may want to seriously consider re-organizing the LLC in another jurisdiction to avoid the $800 CA LLC tax going forward.  That is a conversation to have with your CPA and attorney.

You don't necessarily need to change CPAs, but you should make sure yours is comfortable with reporting the 1031 at the federal level, reporting the 1031 to CA in the year of exchange and thereafter, Sec 1446 withholding, FDAP/ECI considerations, and filing your 1040NRs and any applicable individual state returns.

Dave Foster · Answer

@Lea Hong, because both of you are not US citizens it is very important for FIRPTA withholding issues that the property stay in a domestic LLC.  This insures that you are not subject to the FIRPTA withholding.  It's also a requirement as @Michael Plaks said for the 1031 that the taxpayer for the old property (CA LLC) be the same as the taxpayer for the new property.

But here's where it could get sticky.  corporate structure is a state controlled issue.  So depending on which state you buy your replacement property in you may or may not be able to use the CA LLC as is.  Some states don't care.  Some states require that you "domesticate" your LLC into their state.  And some states may not let foreign LLCs (from another state) operate certain business practices at all.

So, If your CPA does a good job for you then keep them and task them with figuring out what entity will be needed depending on where you purchase.  They'll be perfectly able to pull an LLC for you from any state.  You can also use a registered agent service which will cost you around $400.  Or you can do it yourself in a few minutes for a little bit less.

For the 1031 exchange you'll also need to add the QI (qualified intermediary) who's only job will be the documentation and process of the 1031 itself.

Michael Plaks · Answer

No, an attorney is usually not necessary to register an existing LLC as "a foreign entity doing business in a state" - which means an out-of-state company, not really foreign.

@Eamonn McElroy and @Dave Foster assumed you were foreigners residing outside the US. I assumed you were living in CA but not yet with permanent US residency. We still do not know which is the case. If you live in CA, then Eamonn's suggestion to reorganize your LLC elsewhere will not save you from the annual $800 fee charged by CA.

Lance Lvovsky · Answer

I have nothing more to add other than @Eamonn McElroy has provided you with some excellent guidance.

Lea Hong · Answer

@Michael Plaks I live in NY but I will be moving back to my home country (China) soon. so in that case, re-organize will help me save the $800, right?

Lea Hong · Answer

@Eamonn McElroy thank you for your advice. I totally forgot about the $800 LLC tax...

Lea Hong · Answer

@Michael Plaks Thank you for your explanation. so if I want to register LLC in the state where I am buying, am I supposed to find a licensed attorney in that state? or it doesn't matter where the attorney is located, because I live in NY.

Do I need a new CPA and a new LLC after 1031 in another state?

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