All Forum Posts by: H. James Lee

Looks like Real Estate CPA answered my question.   Depreciation recapture cannot be deferred.

https://www.therealestatecpa.com/real-estate-inves...

I'm unclear about the depreciation recapture if I were to sell a property and invest the capital gains into a QOZF.

Example: Let's assume I bought a SFR for $375k 10 years ago, of which $275k is depreciable. So in 10 years, I would have $100k in accumulated depreciation ($275k/27.5 * 10). Let's say I sell this year and nets $750k after fees and expenses and I never had to do any capital improvements. Capital gains: $475k and Adjusted basis: $275k

Investing in a QOZF would help me defer taxes on the $475k capital gain until December 31, 2026, but what about the $100k in depreciation?  Does it get deferred the same way as the gains or treated as ordinary income on the sale year?  

If you have owned a property for many years, have a low adjusted basis, and high accumulated depreciation, would you be better off going with a 1031 exchange when selling the property and reinvesting the proceeds?

@Stanley Bronstein,

Thank you.

@Dave Foster, @Stanley Bronstein

Follow up question.. With regards to the 2 SMLLCs that will be used, will getting new EINs as opposed to using SSNs move us away from matching as closely as possible in the deeds?

@Dave Foster,

Thank you.  You've been very helpful and responsive.  You'll definitely be my QI next time!

Dave Foster, (sorry, how do you tag a member?)

Thanks for your response. Greatly appreciated. We would refi the whole thing, not just my TIC interest.

I just found another possible solution.  Awaiting our CPA to confirm.  Would love to hear your thoughts as well.

Me and my wife will split into 2 separate single member LLCs purchasing as TIC with my other partners.

"Single Member LLC

To reduce their liability many property owners desire to hold title in the name of a limited liability company (LLC). In an exchange situation the IRS has ruled that a single member LLC will be a disregarded entity. Thus, if an individual holds title to the relinquished property in his or her own name, they may purchase and hold title to the replacement property in the name of a single member LLC that does not elect to be taxed as an association (see IRS Form 8832 and Instructions).

If, in a non-community property state, a husband and wife hold the relinquished property jointly but wish to hold the replacement property in an LLC, they must form two separate single member LLCs. In the nine community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, a husband and wife may have a two member LLC which will be considered a disregarded entity for federal tax purposes."

Piggybacking this great post:

https://www.biggerpockets.com/blogs/5070/37244-103...

Question #2: Can my spouse and I sell a property that we own personally and buy a replacement property in a LLC that is owned by both of us?

.

Answer: It depends - If you live in a community property state (Texas, California, Washington, Arizona, Wisconsin, Nevada, Louisiana, Idaho and New Mexico), the answer is yes. If you live in any other state, the answer is no. This is due to a special rule under Revenue Procedure 2002-69 that states that a LLC owned by a husband and wife in a community property state is also considered to be a disregarded entity and for tax purposes, the property is treated as if it is owned directly by you and your spouse. So, the party that started the 1031 exchange is the same party that completed it.

My Story:

My wife and I sold a property in New York that is under our individual names and we are doing a 1031 Exchange and still within the 45 day identification window. We are most likely going to purchase a commercial property with 2 other partners in a TIC structure out in Houston Texas. Our QI is based in California. We were misinformed about being able to purchase the replacement property as an LLC where my wife and I will be 50/50 members. We now learned that due to the fact that we live in NY and it not being a community property state, the new LLC will not be considered a disregarded entity, and we will have a vesting issue if we sold as individuals and purchase as an entity other than the individuals who sold.

So my question is how can I make this deal happen? I would like to take ownership in an LLC. We, the 3 parties in the deal, have the ability to purchase the commercial property without financing. Also, my relinquished property did not have any debt.

Can I purchase the property in a cash transaction and thus satisfy the 1031 exchange, transfer our interest in the TIC into an LLC and then cash out refinance to have funds ready for the next deal? Will doing this cause the 1031 exchange to fail?

Another suggestion made to us is that if we (husband and wife) in joint tenancy own the membership interest of the LLC (instead as 2 individual), would the LLC be considered a single member LLC and thus become a disregarded entity? How valid is this idea?