STR under LLC- how to pay the least amount of taxes?

[Jessica Chow]

Hello BP family!

My friends and are thinking of investing in a STR in Palm Springs, bought under an LLC. Our biggest question is how to structure the exit strategy in the operating agreement, and the best way to distribute profits to minimize taxes paid, and maximize profit that we gain individually to use to invest in other properties (not under the LLC). We have been doing research on a 1031 exchange, which seems like a great option to defer taxes temporarily, but from what we understand, eventually that may need to come to an end when we eventually sell the property, and pay taxes on the capital gains. Here's the scenarios as I understand:

Option 1: Distribute profits (annually, for instance) via the LLC, and depreciate the value of the house so that we are paying minimal income taxes every year. Keep the house until it is depreciated to $0, and then use a 1031 exchange to buy a Like-Kind property. Then sell the house and pay taxes on the newer purchase.

Option 2: Distribute profits via the LLC, and depreciate the value of the house so that we are paying minimal income taxes every year. Then pay taxes on on the appraised cost of the home when we sell.

Option 3: Distribute profits via the LLC and pay income taxes on the profits, without depreciating the value of the house. Then pay taxes on any appreciation on the house when we sell it. (This is how, I think, most non-strategic tax accountants would do it).

This question may be moot, because it depends on each individual's end goal, but was curious anyone's initial thoughts, pros/cons, or insight into other options we may be missing. Thanks in advance!