All Forum Posts by: Dylan Johnson

Hi Rebecca, 

Couple things I want to point out here. First I am assuming by several years it has been more than 2 tax reporting years since the 1031 exchange. This would allow you to make material changes to the deed without risking qualified use being in question from the original exchange. Material changes, being something similar to your proposed. LLC -> Revocable Trust.

The more important factor I would look into is how soon from the change do you foresee any properties being sold? The reason I bring this up is that changing from a single member LLC to a trust with both you and your Husband could potentially reset your 2 year holding period requirements if you wish to 1031 exchange again in the future.

I would definitely recommend reviewing this with your CPA to get a good idea of any tax implications outside of 1031 exchange know how. 

If you are in a community property state, there may be more of a basis to stand on that this would NOT reset your 2 year holding requirements. Community property states view a Husband/Wife as one unit, at least for 1031 purposes. 

@Kevin Sobilo is correct, this property will more than likely not qualify for 1031 exchange treatment. One of the rules in the IRC states that property must be HELD for productive use in a trade or business or for investment. The general understanding throughout the industry is that 2 tax reporting years meets this qualified use rule. Furthermore, you need at least 14 days of rental income in each of those two tax reporting years. 

I also second what he said about your accountant. 1031 exchanges are wildly un-complicated. Even super complex improvement exchanges that require parking entities are not the end of the world if you have an experienced Qualified Intermediary. 

If you bought it 8 months ago I am assuming you reported the property on your 2023 tax returns. That would mean at a minimum you could look at 1031 exchanging after this year. Now, that doesn't guarantee the qualified use will be met but it at least holds much more weight. 

Any capital improvements you made on the property should lessen that tax burden on this sale, however, your CPA should have already explained that. 

Happy to answer any more questions.

All the answers so far have been great, I just wanted to point out one additional consideration. When utilizing a 1031 exchange, the general industry consensus is that the replacement property needs to be held for a minimum of 2 tax reporting years after purchase to fulfill the qualified use requirements. Unfortunately this is a rule that is not directly referenced in section 1031 of the tax code but takes its precedence from the "intent to hold for business use" rule. 

I would also advise you to speak with your CPA on the specifics, but food for thought if you are planning to sell the acquired SFR's within a year of purchasing via 1031 exchange.