All Forum Posts by: Nick Frey

Property A was owned by LLC A 50/50 me and another partner. After five years of LLC A owning Property A, I created LLC B with two extreme-minority partners (0.5% each, as a formality for lending purposes) and bought out Property A.

I used my $250k primary residence cap gains exclusion on this sale from LLC A to LLC B after having two tax years where Property A was not generating income (less than 14 rental days per year) and could be deemed a personal residence instead of investment property. Also didn't depreciate it as a business asset.

Sale price set a new cost basis for LLC B. Closing date of this sale from LLC A to LLC B was October 9, 2020.

Now Property A is going to likely be sold with closing in July or August, 2021...less than 12 months later.  The gain is going to be extremely significant, likely a 50%+ increase from the 10/9/2020 closing.

It was not a flip and was not intended as such, it was used by LLC B as a long-term rental...but now taking advantage of market conditions, re-leveraging, etc.

QUESTION: is this a 1031 candidate, or am I running the risk of an audit at least, and possibly getting hit with massive cap-gains at worst?  I'm hoping to 1031 into a larger MFH investment or self storage...but I've contemplated a good-looking OZ fund in Colorado as well.  It sounds like the OZ option might be safe since there isn't a lot of "precedent" set yet, and it's relatively flexible in its interpretation of capital gains.  But the 1031 option might be the way I'd rather go, I just don't want to find out I'm disqualified for it because of the under-365-day STCG issue...

Thanks for that!  I've not carried back because I've been able to essentially not pay taxes for the last 10yrs by running multiple businesses, expensing everything, and investing profit into assets with significant depreciation losses.  All tax years have had zero income tax and only some FICA, which--correct me if I'm mistaken--cannot be offset by anything but simply not making the income (i.e. cannot be offset even by active losses from other pass-through entities).

All NOL have been carried forward, and I don't believe I'm at risk of dropping any NOL in the next couple years because the oldest carry forward at this point is probably from 2016.

What changes in treatment of NOL did CARES make for 2018-2020?

Is it only STCG that are offset by NOL due to their treatment as ordinary income?  Or does NOL affect LTCG as well?  If it's only affecting STCG, wouldn't it be an interesting strategy to roll STCG proceeds into a long-term asset immediately that would create paper depreciation losses in the case one could qualify them as active?

I've started at the outset by carefully considering "total return" that hinges on leverage and tax efficiency, so I'm always looking for how to scale what I do while maintaining focus on that theme.

Short term cap gains basically get counted as income...you have $100k income and $100k short term cap gain, you basically have the same as $200k income.

I've been very careful over the years and have tremendous carryover losses within ordinary income (active losses as RE professional).  If I were to sell a flip this year and earn $100k short term cap gain, does this add to a large negative carryover loss and essentially just eat into my "banked carryover"?  I.E. does this mean I can avoid paying short term cap gains?

@Dave Foster, thanks so much for this info!  Extremely helpful.

#2 is definitely the best option for what I'm looking to do.  I've broached the subject with some investors about option #3, and they want to stay invested in the original asset and join me in putting the refi into another investment (likely more passive).

I'm curious if you or anyone else on BP has had experience with Opportunity Zone funds.  I've found a promising one in Colorado (haven't yet drilled into the PPM but initial hour on the phone with a key operator was extremely positive) and it sounds like an incredible backstop if a 1031 hits the rocks and fails for any number of reasons.  I was told you can role the cap gains from a sale into an OZ up to six months after the standard filing date for the entity (i.e. sale in 2021 means filing date of partnership return by Mar 15 of 2022, OZ investment by early September 2022) and you don't pay taxes.

Maybe this is covered in other posts, I just haven't looked.  But there are basically two thoughts going on here: the mechanics of buying out existing investors (which I think Dave has really handled succinctly) and then comparing that with the pros and cons of an OZ fund.

Hey BP crowd, I've always been a reader but this is my first post.  I'm always in awe of the cumulative experience and intelligence found on this site, so thanks in advance for thoughts and input!

Quick background: I'm a member of 10 LLCs, each of which holds a single asset, and I'm the sole member of the LLC which manages these properties. Each holding LLC has between two and three members, and so I'm between 25% and 50% owner of these except for one that is 99% me.

I'm trying to re-lever. I'm 34, in this for another 10-15 years, and while I'm slightly concerned about current valuations, I've got a "good" problem with my LTV. It's down around 35% based on conservative valuations and I want to get up to around 75%, which means doubling assets under control (mostly going more into passive NNN and MFH options versus active management of SFR).

Since I'm not a strong buyer with leverage in this market (I'm seeing all-cash $100k over-ask no contingencies bidding wars right and left), I'm looking instead to buy partners out of existing ownership of these LLCs. They would 1031 into a DST or something bland and safe until their tax situation is better, divorce is over, etc. I'm still in business with them on other properties, known for 10+ years, good friends, etc. I need to carefully consider their situation in my thought process.

QUESTION: I am selling a property (call it Property A) and need a 1031 outlet. If I am a member of another LLC which owns a single asset (call it Property B), and there are two other members, can we split the Property B LLC into a TIC and can I then 1031 into their ownership with the proceeds from the sale of Property A? I'm concerned about how many hiccups there can be from the complexity here as well as the raw numbers, leverage, boot, etc. But I don't want to do further brain damage going down this path if there is some absolute constraint I'd be breaking within the 1031 rules.

I think, if this worked out, I'd essentially be a TIC with myself in a single asset...I'm not averse to this creativity and legwork, and there is a lot of money at stake so it's worth the effort. I just don't want to raise enough red flags to get an audit and have my life upside down, as I have enough work to do already.

Thanks everyone, and I hope this makes sense!!