1031 exchange using single member LLCs

Hi how are you?

I have one question for which you may have many similar cases.

 

I sold the apartment in NY which was held by "H Enterprises LLC", a NY LLC.  Now I want to purchase three properties in FL, and I understand they have to be purchased by "H Enterprises LLC".

 

The local banks here says that I have to create Florida entity to borrow money from banks.  So I have to incorporate "H Enterprises LLC" a FL LLC.

 

Do you think I will be all right regarding the 1031 exchange?  I am sure there must have been similar cases that your firm might have dealt with regarding the inter-state, trans-state transactions including LLC.   I would highly appreciate your advices regarding this question.

 

Thank you very much,

Best regards,

 

Dear T:  Single member LLCs are sanctioned by most states.  I gather that two of those states are NY and Fl.  Although sanctioned under state law, the IRS has ruled that you can treat them as disregarded entities for income tax purposes.  What this means is that you can sell in one single member LLC and purchase in another sing;e member LLC and, because both are disregarded entities your 1031x is valid.  What it also means is that you can sell in your single member LLC and buy in your indiviual name if that works better for you.  Finally it also means that the LLC does not have to have a tax ID number, does not have to file a tax return and that all the tax incidences of ownership and sale can, instead, be reported on your individual tax return.  I can cite the tax autority is support of what I am telling you if you need it.  I believe this should simplify your life considerably.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange and development

Dear 1031x: If you sell an apartment building to do a 1031exchange into another apartment building of like or greater value and then two years later develop it into
condominiums or tear it down and develop it.  Do you then have to pay taxes?

Dear D:  The IRS treats investment activity very differently than development activity.  Investment activity is subject to capital gains tax (15%) and is 1031x eligible.  Developement activity is subject to ordinary income tax either personal or business (35%).  It is also sometimes subject to self employment tax and if performed by a corporation is subject to corporate tax.  If you go forward with your plan you need to separate the two activities.  Make sure that you hold the apartment buildings for investment.  When you are ready, form a separate developement company which your investment company then allows to develope the property.  The value of the property, prior to development, is determined, preferably by appraisal. The investment company needs to keep its identity and investment activity separate.  Then when the property is redeveloped and sold the development company reports its profits as ordinary income while the investment company reports its gain as capital gain.  I hope this helps.

life estate and step up in basis

Dear 1031x: What is the basis for a property that comes to me as a remainder for a life estate held by my father? His basis or the value upon his death?

Since I am not inheriting the property by Will,
but as the remainder from his life estate, will I be able to to use the inheritance tax allowance of $1,500,000?

Dear P:  I am not sure of the answer to your question but I believe this is correct: 1) The full value of  the property will have been included in your father's estate.  2) This stepped up basis will be reflected in his estate tax return. 3) You will get a stepped up basis so, when you sell it, you will only have to pay income tax on the increase in value since the step up in basis.  Sincerely,

1031 exchange failed in next year

Dear 1031x: On your web site, there's a reference to failed exchanges still  having some deferral value.  I can't find any reference to this in the  regulations. 

 

Dear E:  The rule is as follows: If a 1031x is begun in one tax year, and is open and available for completion at the turn of the tax year, and then fails in the next tax year, the gain can be reported in that subsequent year, instead, as is usual, in the tax year in which the exchange began.  I can cite specific authority to that effect to you if needed.  May we help with your next 1031x? S.

1031 exchange and conversion to principal residence

Dear 1031x: We have a second home that we have rented out for over five  years.  We wish to sell that property thru a 1031 exchange and use the  proceeds to purchase a new property as our principal residence. We know we have to hold the new property for five years, which we plan to  do.  Can we still use a 1031 like-kind exchange in this transaction?

Dear R:  Until 10/04 there was no question that you could not sell an investment property and buy a principal residence and claim 1031 tax deferral.  For that reason taxpayers would pretend to rent the new property for some time and then move into it.  In 10/04 IRC section 121 (deals with principal residence) was changed to state that if you did a 1031x and then converted it to principal residence you must hold the new principal residence for 5 years instead of only 2 in order to qualify for tax exemption under 121.  By making this change it seemed to be a tacit acceptance of this tax strategy.  Please remember that IRC section 1031 was not changed- investment for investment.  All I can really tell you is that there is substantial ambiguity in the tax code and no positive answer to your questioon.  

Steve Hickox
Attorney / President

1031 exchange and inherited property

Dear 1031x: I am part owner of a house that I inherited from my father.  I have never legally resided in the house myself.  Probate Court gave me a share of the house in the  mid 80's when my father passed away. After the Probate Court made me a co-owner of the property, I signed over  my share to my aunt in a life-estate agreement, so she could remain in the  house for the rest of her life.  My aunt was placed in an elder-care facility in late 2004, and the  life-estate agreement was terminated on that day. So I then again had  control of my share of the property.  Now the house is finally for sale with a  broker.
 My plan has always been to take the proceeds from the house when it sells  and buy a small home for myself in the midwest.  Now I learned I may be subject to a  capital gains tax because I never actually resided in the house myself. Is there a way the 1031 or any other section of the capital gains law  takes into account a house that was passed down from family members as  part of a parent's estate? Or will I need to buy out the entire house and  move into it for two years to qualify for exemption from capital gains  taxes?
Thanks for any help you can give, no one else seems to know the answer to  this.

Dear W:  Your inherited property is 1031 exchange eligible because you have held it for investment.  However, the property that you propose to buy is not 1031 exchange eligible because you plan to live in it.  For a 1031 exchange to work both old and new properties must be held for investment. Yes, you could move into the inherited home and live there for two years making tha tproperty 121 eligible.  Sorry there is not a perfect solution for you.  Sincerely,

Steve Hickox
Attorney / President