Posted by JHyre in Ohio on April 29, 2000 at 15:18:21:
You are correct…cannot do stock for property under 1031, but can under 351 (for corp, have majority requirement) or 721 (for partnerships & most LLC’s, no majority requirement). Original post was correct in concept, merely erred by calling contribution of property for stock/LLC shares an exchange, which it in fact is in English but not in Codese…so “we’re all right”, under all three definitions of the phrase.
John Hyre
1031 Exchange - from proprietorship to LLC? Need ideas on how to structure - Posted by John J.
Posted by John J. on April 28, 2000 at 24:51:20:
I sold a house that I owned as a proprietor and the funds are in escrow with an exchange accomodator. I am to close on a replacement house any day now. I meet all the requirements of the 1031 exchange if I put the property in my name only. However, my son is going to join me and learn the rehab business. We have agreed that I will fund the investments and he will do the rehab work and we are splitting the profits. I’d like to set up a LLC or partnership for this next house, which will be our first one together. The 1031 rules state that the replacement property be held by the same entity as the original one. How can I use the 1031 funds now in escrow to purchase a house with my son? Do we need to do a 2-step transaction? How do I then carry forward my basis from the old property? Our plan is to sell this new home rather soon. Is there a minimum holding period for properties purchased with 1031 funds? I have checked with my attorney, the accomodator,and the VP at the Title company - all knowledgeable about 1031’s - but none offered a solution.
Re: 1031 Exchange - from proprietorship to LLC? Need ideas on how to structure - Posted by John Butler(Stl)
Posted by John Butler(Stl) on April 28, 2000 at 11:21:51:
I would check around a little more. When I did my exchange with apiexchange, I went from having the property in my name to a single-member LLC for the replacement property. As I recall, they said as long as it is a single member LLC, then the IRS considers it a non-entity so the 1031 is valid. You could probably do that and then find a way to give some of the LLC to your son from there.
Hope this helps,
John
Re: 1031 Exchange - from proprietorship to LLC? Need ideas on how to structure - Posted by JHyre in Ohio
Posted by JHyre in Ohio on April 28, 2000 at 11:08:31:
Two solutions:
Hold for 2 years and then contribute to LLC tax-free. IRS will not fight this; or
Complete the exchange into your name and then immediately contribute to LLC tax-free. IRS does not like this…but has lost every time in court. Ask your tax advisor to look at Magnusen and Bolker cases.
John Hyre
Re: 1031 Exchange - from proprietorship to LLC? Need ideas on how to structure - Posted by Bill (OH)
Posted by Bill (OH) on April 28, 2000 at 08:00:25:
You need to talk to the folks at Starker Services. They hold billions of dollars in exchange money and are one of the major ‘shaker and movers’ in this area. Their web address is:
Or call: 1-800-332-1031
One way to solve your problem is to exchange stock in the new corporation for the property and then put the property through the exchange. If the property is already in the exchange process, I’d say talk to the folks at Starker to see if there is a way to do this. A good reference book for these exchanges is:
‘Real Estate Exchange’ by Howard A. Zuckerman and Rochelle Stone.
One thing I can tell you is that these exchanges are not designed for fast rehabs. In general, to stay off the IRSs’ radar, you need to hold onto these properties for at least a year. Remember, the purpose of a 1031 exchange is to get around the Fed. ‘recapture of depreciation’, ‘capital gains’ tax, and state taxes. So, you’re looking at long term projects. BTW, these exchanges work great matched up to lease/options. You simply put in the lease that the property will be sold through a 1031 intermediary when the option is exercised.
For short term rehabs, many accountants/attorneys suggest a ‘subchapter S’ corporation because you can take some of your income in the form of dividends which are taxed at a lower rate. Good luck!
Capital Gain Tax Considerations - Posted by John J
Posted by John J on April 28, 2000 at 10:20:14:
Thanks, Bill, for these great ideas. I’ll follow up with your suggestions. My son will be in a much lower tax bracket than I am; probably 10% for capital gain. I want to structure the arrangement so that his share will be taxed at his rate, not mine.
I don’t believe that you can exchange stock for realty… - Posted by David Krulac
Posted by David Krulac on April 28, 2000 at 10:44:39:
that presents another problem for a 1031, NOT a like kind exchange. Stock is personal property (even of a real estate company) and real estate is REAL property.
John, you need to talk to a CPA/tax attorney, who is familiar with 1031. If you don’t you’re begging for more aggrevation than I would want.
David Krulac
david@centralpennlots.com
Re: I don’t believe that you can exchange stock for realty… - Posted by JHyre in Ohio
Posted by JHyre in Ohio on April 28, 2000 at 11:13:07:
David,
While “exchange” of stock for property was suggested, what he really meant was a tax-free contribution to corporation for stock…effectively a tax-free exchange, even if the technical jargon indicates a contribution. Same issues as I brought and addressed by Magnusen and Bolker cases.
John Hyre
Re: I don’t believe that you can exchange stock for realty… - Posted by Bill (OH)
Posted by Bill (OH) on April 29, 2000 at 15:10:59:
John, I’m not sure that we are on the same page so let me try this again. As far as I know, you can’t swap property for stock in a corporation under section 1031 of the IRC. There is another section of the code though that allows you to do this IF you are the majority or controlling shareholder in the corporation that the property is being transferred to. In this case, under the IRC, a taxable transfer has not occurred. I mentioned this because the original poster wanted to get the property transferred into an LLC and this is one way to do so. Then, after the transfer, a 1031 exchange could be set up that would meet the rules. Sorry for the confusion folks!