LLC And TIC Propertiess Traded In One 1031
My partners and I have a property held within an LLC. (Taxes are paid individually by each partner.)
We also have properties outside the LLC held as Tenants in Common.
We want to trade the LLC and TIC properties together for one larger property. Would we be violating any 1031 rules with this exchange?
Thank you,
Read here first to set up knowledge about an exchange.
http://www.realtyexchangers.com/KB/1-1031Stacks.htm
Then read this form pdf about the exchanges from the IRS form 8824, pay particular attention starting from paragraph 7 on the general instructions about related parties on through that part of the instructions.
http://www.irs.gov/pub/irs-pdf/f8824.pdf
I always advise clients to use the Best exchange company you can find or an exchange using a qualified exchange accommodation arrangement (QEAA) or an intermediary. If you make a mistake it is not an erase and refile, you live with it and the TAX can be very substantial. Hope this helped some.
Make sure you touch base with an attorney or CPA qualified in exchanges at the very least.
What will happen is that we will become Tenants in Common with our LLC on the upleg. After the exchange is complete we can transfer our interest into the LLC.
Final answer:"After the exchange is complete we can transfer our interest into the LLC"
ReRead what I posted to you about RELATED PARTIES. Also the holding period after exchange needs to prove intent for investment purposes.
AND MISTAKES ARE COSTLY HERE:
CONSULT AN ATTORNERY FAMILIAR WITH 1031 EXCHANGE!!!!
As I am interpreting the section on ‘Related Parties’, it pertains to doing an exchange where the buyer and seller have a relationship. (ex. The upleg property is currently owned by a related party). For the 1031 we (LLC or TIC) have no relation with the sellers.
I believe page 3 paragraph 3 addresses transferring our personal interests into the LLC after the 1031 to satisfy the IRS. It reads: “An exchange in which the related parties derive no tax advantage from the shifting of basis between the exchanged properties,,,”
We see no tax advantage. We still pay our taxes individually outside LLC. The LLC is strictly for liability purposes.
I hope I am interpreting all this correctly. But I will certainly bring these concerns up with the facilitator.
Now, I don’t know if it’s funny or alarming that our attorney referred us to our CPA, and our CPA suggested we consult a 1031 specialist. The answer I got in my previous reply is from the specialist facilitating the exchange. We will have all three involved with the exchange.
If you see anything horribly wrong with this, please let me know. I definitely want to go over any issues.
Thank you,
Quote:
On 2005-11-16 14:40, DonP72 wrote:
What will happen is that we will become Tenants in Common with our LLC on the upleg. After the exchange is complete we can transfer our interest into the LLC.
You are correct.
Your LLC, as well as your TIC, will be acquiring an undivided interest in a property owned by a NON-related seller.
You are NOT exchanging LLC property for a TIC property (both owned by you, or the same individuals). There is NO problem with related parties, since you are exchanging the property hold in the LLC into a partial interest in a new, owned by a 3rd party property (ditto for the TIC).
After the exchange is completed, you can contribute your TIC interest to your LLC (similar to capital contribution, IRC 119)
[ Edited by kittiwulfi on Date 11/18/2005 ]
There are two issues here.
First, the LLC and each individual taxpayer must be considered separate taxpaying entities. The LLC would sell its property and acquire an undivided percentage interest in the property being acquired. The individuals that hold title as TICs would also sell their respective TIC interests as individual taxpayers and each acquire an undivided percentage interest in the property being acquired.
Second, each taxpaying entity must have the INTENT to HOLD the acquired property for investment purposes. The immediate transfer from the individuals into the LLC after the close of the acquisition could allow the IRS to take the position that the individuals never had the INTENT to HOLD the property for investment purposes. I would recommend HOLDING the property for 12 to 18 months minimum in order to demonstrate that each taxpayer had the INTENT to HOLD.
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DonP72
I believe WEXETER has nailed the problem down. Proving they are seperate tax paying entities. Then
If you can satisfy the related parties barrier and then prove intent as I said earlier and as he said holding it proves intent.
Make sure you talk with a 1031 attorney, I cannot stress that enough.
There is actually a potentially huge problem here. You are correct that the IRS does not specify a holding period and that creates a lot of confusion. The issue is that the taxpayer must have the INTENT to HOLD and proving the INTENT to HOLD can be very problematic if the property is contributed immediately into another entity. The IRS and the courts have taken the position that the taxpayer did not have the intent to hold because there was an immediate conveyance into another entity. There have also been a few cases where the transfers were allowed, but these are old cases and one should be careful in relying upon them. This is not an issue to take lightly. It comes up all the time. There are ways to work around the issues with time and plenty of proactive planning, but to shrug it off as nothing to worry about is very dangerous tax planning.
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Thanks Kitti.
I should also add that I have heard that you need to work 750Hr/yr AND more than 50% of all work hours. If that is true it is hard for me to say I work more at REI than my full time job.
hoober,
To be a real estate professional you need to work at least 750 hours per year in a real estate business or related activity.The business must be an active income business in which you "materially" participate, and,the total number of hours worked in this business activity must be at least 50% of all your personal service hours spent in all activities.
By default, rental property operation is a PASSIVE income activity. Just managing your own rentals fails to meet the second requirement for real estate professional status.
However, managing your own rentals is active participation in your passive income activity and thus makes you eligible to take advantage of the $25K net passive loss allowance on your 1040.
Since you have a full time job, working about 2080 hours per year, to also qualify for the real estate professional status you would have to spend at leat 2081 hours per year moonlighting in your ACTIVE income real estate activity. I agree, it is kind of tough to get the real estate professional status as a sideline when you have a full time job.
Hi, NewKid,
is it telepathy, or why we post simultaneously, and not for the first time?
Best regards,
Ines
ooops ... it seems, I misunderstood, and hoober works 2000+ hours in his job. Sorry!
Another possibility for hoober: his wife could get a license, and then as jointly filing returns, she is qualified. What do you say, NewKid?
They still have a problem qualifying as a real estate professional if their only real estate activity is managing their own rental property.
Then how does one "qualify"? Say you meet the requirements by law - who allows you that status? Do you simply claim it or do you have to first prove it to the IRS and then you get the credit?
Quote:On 2005-11-27 22:46, hoober wrote:
Then how does one "qualify"? Say you meet the requirements by law - who allows you that status? Do you simply claim it or do you have to first prove it to the IRS and then you get the credit?In a certain sense, you do both. If your spouse has her real estate license and manages to work at least 750 hours per year as a real estate agent as her sole source of income, then she has met the basic requirements to claim the real estate professional status.
As a licensed real estate sales agent, she is an independent contractor in an ACTIVE income real estate activity. All her real estate income and business related expenses will be reported on Schedule C and Schedule SE. She would keep logs of her daily sales activity anyway to claim her mileage expense.
The question you need to answer for yourself, is whether you are willing to convert your passive rental property to active income property. Yes, by converting to active income property, you do get to claim net passive losses on your 1040 without regard to the $25K limit. The downside is that when you sell your active income rental property, your profit is now ordinary income taxed at your ordinary income tax rate -- you give up capital gains tax treatment in exchange for eliminating the $25K limitation on net passive loss allowance.
Net passive losses that you can not use are not lost. Instead they are suspended and carried forward to the next tax year.
Thanks all for the info. I have another year before I have to worry about exceeding the 25K, so I have time to do the math and crunch the numbers to see what works best for me.
Good for you, Hoober,
you have time to read that:
http://www.irs.gov/pub/irs-pdf/p925.pdf
I have a fulltime job were i work 40 hrs/wk. i also spend atleast 40 hrs/wk in real estate ventures - talking to my tenants/ agents/ builders/ developers & other investors. I own a corporation which makes more money than my day job through my RE activities. Does that mean I can qualify as a RE professional?
There can be many issues involved. It could be characterized as a sale depending on how you structure it, but it would more than likely create some kind of gift tax issue. I would strongly advise consulting with either an estate planning attorney or tax attorney to help with the transfer.
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Thank you for your reply. Most likely wont be able to avoid an attorney. Was trying to figure out which direction to go. She just wants it (the property)to be my responsiblity and problems of course, plus protect the property by keeping it on my side of the family. Someone mentioned a type of trust....
What about a revocable family trust, with you controlling it? Would that accomplish what you need?
Dan - hire a good attorney for a consultation. Spending a few thousand with him/her could save your family a lot of money. The attorney should be able to tell you in the initial consultation whether there are things that can be done to achieve your objectives.
mcole hit the nail on the head. Thanks folks....My first posting and i am amazed at the response. When do you guys go out and make any money?....Just kidding....