Further 1031 Questions
I am currently in an LLC with three other equal partners. We are currently in the process of selling a building which we have owned for over 8 years.
Escrow should close mid december.
I and one other partner wish to move forward and purchase a new building, the other two will pay the taxes.
My partner and I have identified a new building and we want to hold it in an LLC for liability purposes. We have made an offer and had it accepted. Escrow is scheduled to close on Jan 31, 2005.
We now need to move forward with Deposits, establish loan docs ect.
How do we make sure that:
1. The two partners who are leaving get their portion of the current builing
2. Are excluded from the new one
3. Mainting the integrity of the 1031 for my partner and I.
Just to complicate matters, my partner and I also own the business which is the tenant of the building to be sold and the building to be purchased.
:-?
You have a number of issues here. The first and most difficult is the fact that the current LLC owns the property and the underlying members of the LLC do not want to stay together. The taxpaying entity that does the 1031 exchange must be the same taxpaying entity on both sides of the transaction. If the current LLC sells and the new LLC buys then you have completely different taxpaying entities and will not qualify for a 1031 exchange. There are a number of ways to correct this problem, but they will all have some degree of risk in that the IRS could disallow the transaction under audit. It is also difficult to address the different solutions without being able to ask more questions. I would be happy to discuss the issues with you if you are interested. So, question number one is the difficult part. If the LLC just simply sells the property and then distributes the cash the members of the LLC have not sold real estate (the LLC did), but have merely received a cash distribute from an LLC and this would not qualify for 1031 exchange treatment. Question number 2 is easy, if the problem can be addressed in question number one. The best way to structure the acquisition if you have a concern regarding liability is for each individual to set-up their own individual (single member LLC) and each LLC would acquire an undivided XX% interest in the replacement property. Operating your own business out of either property is NOT a problem. Like kind property includes property used in your business. Once you have solved question number one all of your other issues will be easy.
If you wish to discuss the issues for question number one you can reach me at (866) 634-1031.
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