All Forum Posts by: Sean Ross

Hi @Kamal Sukhija,

Good on you to think about this ahead of time.  Short answer: No, you don't need to (or likely want to) transfer the deed to an LLC before selling. 

Instead, you've got a couple of options:

1) Keep it in your names for the exchange, then move it into an LLC later. This is the cleanest way to do it, but transferring it post-exchange could have tax or lender implications.  As @Steve Wolterman mentioned, throwing the property into an LLC could accidentally create a partnership for tax purposes.

2) Buy the NNN property in a single-member LLC (SMLLC). If the LLC is wholly owned by you or your spouse, but not both, then you still get to report this possible 1031 exchange on a single joint tax return. So this can work.

There are layers to each of these.  Do you have further questions?

Best,

@Joe M.,

Best advice on getting started is to find a short list of top 1031 companies to work with, call or email (call is best) to discuss your situation and their credentials.  It might take 30 - 90 min out of your time, but it is well worth it to make sure you're comfortable working with the right team. 

As has been mentioned, location doesn't really matter, especially on the East Coast where unique 1031 regimes are rare at the state level.  

Normal diligence is good to go through: years in business, reviews, responsiveness, personal references, insurance and bonding, etc. 

You're trying to defer large tax bills; a mistake by you or your QI could be a very big problem. Take a bit of time to find the right partner. 

Let this community know if you have further questions. 

Happy to chat further, too.

HI @Islah Barney,

You're navigating a complex intersection of real estate, tax law, and Medi-Cal eligibility—and you're right to think through your options carefully. A 1031 exchange could be a potential tool, but there are some key hurdles to be aware of.

For a property to qualify for a 1031 exchange, it must have been held for investment or business purposes—not as a primary residence. If your mother has primarily lived in the Sun City home rather than renting it out as an investment property, the IRS may not consider it eligible.

The 14-day rule you mentioned applies to vacation rentals and second homes that are used as investment properties. But if the home has been strictly a residence, it likely doesn’t meet the criteria.

Since this was your mother's primary residence, she may qualify for the Section 121 exclusion, which allows her to exclude up to $250,000 of capital gains ($500,000 if married and filing jointly). This could eliminate the need for a 1031 exchange altogether...?

Deeding the home to you before selling it doesn’t automatically make it exchange-eligible. The IRS requires that the same taxpayer who sells the relinquished property must acquire the replacement property. If ownership transfers too recently before the sale, it could disqualify a 1031 exchange.

Medi-Cal’s asset limits add another layer of complexity. Selling the home could impact eligibility, so it’s critical to align any real estate moves with Medi-Cal’s requirements. An elder law attorney or Medi-Cal specialist can help structure a plan that ensures your mother gets the care she needs while protecting assets.

You have multiple paths forward, but the right one depends on timing, tax strategy, and Medi-Cal planning. Happy to discuss what might be feasible in your case.  Of course, we are not elder law care or even Medi-Cal experts -- we'll need outside help on that front. 

Spot on, @Bruce D. Kowal!

@Rob Rayborn,

Thanks for the post and question.  And here's a very premature toast to a happy retirement. 

You're looking for increased cash flow, so managing more doors and/or strategically utilizing leverage can make a certain sense there...but as you mention financing costs aren't as rosy as they were 2-3 years ago. 

If you go the 1031 route, here are some rules when trying to combine multiple sales:

1. Deferring All Taxes - if you want to defer all taxes, make sure that the total value of what you buy is greater than $580K (or whatever your final combined net sales value ends up at) and that you use all of your sale proceeds as down payment on your replacement property(ies).  I don't think these will be hard given what you've written.

2. Timing Your Sales - From a technical / IRS standpoint, it's easiest (and cheapest) to have all three of your sales close before your purchase, and to have all four of those transactions occur within the same 180-day calendar block. However, there are ways to structure your 1031 to accommodate virtually any timeline you can think of -- sell one, buy one, sell the other two...buy, then sell all three over time, etc.  The only catch here is that each scenario comes with its own rules and potential additional costs.

@Gabe Capoferri,

Communicate to them directly that you understand 1031 and want to make this easier and more flexible for them. Tell them that you'll work with their timeline. 

Outside of that, you're left working with normal buyer/seller relations. 

@Daniel Shuler

It is possible to include owner carry financing as part of a 1031 exchange. It's likely best to jump on the phone with an expert to discuss this, but I'll leave a quick description below:

Owner financing is a tricky issue for tax purposes. The IRS considers it a loan, just like any other, that represents potential interest income to the lender (in this case, you). Seller financing won't have any impact on the potential capital gains that you would face by selling a property, either -- you're still selling a property for the same appreciated amount. It doesn't matter if you also happen to be the lender and the seller.

There are a lot of possible issues with seller financing while doing a 1031. It's possible! But you want to be careful. A direct attempt at seller financing will result in taxes being recognized for the value of the carryback note (making the exchange less efficient). The carryback note is not considered a valid asset to receive in an exchange. For example, if you sell a $500K property with $150K in seller financing...well, the $150K will be excluded from the exchange and capital gains taxes will be recognized as payments are made. Even worse, all of the depreciation recapture taxes allocable to the $150K will be recognized and due in the year of sale.

(There are even some who believe that the seller providing a loan to the buyer will disqualify the exchange entirely, but that's not been our experience.)

The most straightforward solution is to have the seller provide a cash loan to the buyer outside of closing. This way the buyer can come to closing with all of the necessary funds to allow for a normal 1031.

If the seller is not liquid enough to provide a loan, they could attempt to find another financing option for the buyer. If this doesn't work, then the seller can have the carryback note made payable to their 1031 Qualified Intermediary. The Intermediary can then sell the note to any party, including the seller or a seller's family/friends. Any proceeds from the sale of the note can be added to the 1031 exchange account to allow for more tax deferral.

The issues get a little deeper, but the key takeaway is that careful planning is very, very important. A lot of my company's clients are trying to do this in 2024, with mixed results.

Happy to answer any questions you have.

When we're getting into the weeds here, @Keith Consiglio, the real question we're untimely asking is "If a state or federal auditor looked at what I did, would this cause any headaches for me?"

If the IRS, for example, looked at a closing where you put $150K down ($100K from a 1031 exchange account and $50K from outside personal funds) on a mixed-use duplex where the value is split 50/50, then they could very easily argue that $25K of your exchange funds went to acquire non-like-kind personal property. This wouldn't kill your exchange, but it would result in taxes owed on the $25K plus interest and possibly a penalty. 

This is why I like treating each part -- investment and primary residence -- as a distinct purchase even if there's only one closing and one contract.  You want separate settlement figures showing exactly where the funds came from and how they were used so that the regulators can't hose you. 

@Tyler Brobst, you've got a few hurdles from a 1031 standpoint.  

If you've already filed your 2023 tax return, how did you list this property?  Was it all a primary residence, or did you list a portion of it as an investment asset (with depreciation taken and rental income declared)?

Yes, @Keith Consiglio, you can do this.  In any of these potential scenarios, use this checklist:

- Is the investment/rental portion of the new property at least as valuable as what you previously sold in the 1031 (raw land, in your case)?

 - Is all of the equity from your land sale being transferred (through a Qualified Intermediary) to only the investment/rental portion of the new property?  See my note below about separate settlement statements. 

- Is the investment/rental portion of the property owned by the same taxpayer (person or entity) that sold the land?

If you can check these boxes, you're going to be starting off in great shape.  There are more 1031 rules to follow (always), but these are key. 

Now, this next part is technical but important: When you work with a QI, you also want to make sure that the personal residence portion is specifically excluded out of your Exchange Agreement and the Assignment of Contract to the QI, and there should be separate settlement statements for each side of the transaction. A good QI will make sure all of this happens for you by coaching everyone involved; you don't need to become an expert or a middle man.