LLC 1031 Exchange
My sisters and I inherited a home in NJ from our mother which at the time of her death was rented, so we continued to rent it and formed an LLC to protect ourselves. The house was free and clear when we inherited it. and was appraised at $388,000. We also bought a vacation rental property in NC between us, but that property is mortgaged and not in an LLC.
My question is this, we are thinking of selling both houses for 2 purposes.
1. to upgrade in NC to a more profitable vacation rental.
2. to buy myself a small house in NJ to use personnally.
So, can we sell both houses and do a 1031 exchange to upgrade in NC even if one is in an LLC & the other isn't.? Also, can we do that and keep $380,000 to purchase a personal home in NJ? What would the tax implications be? Seeing as our inheritance portion was $388k would that negate our capital gains?
We would really like some advice to do the most with our investments. 
You cannot do a 1031 exchange into a property in which you are planning to live, so that would rule out the personal home option.
Also, any "vacation rental" in which you have spent more than 14 days in, qualifies as second home, not an investment property and would not qualify for a 1031 exchange either.
How long ago did you buy/inheirit the properties? Is there enough appreciation to consider a 1031?
We inherited the one house in 1/2000 and bought the other in Oct. 2000.
We do not use the vacation home more than 14 days, and I realize that we can't do a 1031 exchange for personal use. We need to sell both houses in order to be able to but a good downpayment on the upgrade vacation rental, and we do not want to use all the monies for that house, but 3/4 of it will go towards it.
So if we keep 1/4 of the monies will we have to pay capital gains?
If you take the sales price less the expenses of the sale, anything from that amount not used to purchase the new properties will be taxed as capital gain, but, obviously, you can't recognize more gain that way than if you just sold the properties.
If you don't use the vacation home, is it rented or just vacant?
The house is rented for seasonal vacation weeks, then it empty during the winter months.
Our accountant had told us that if we sell the house that we inherited we would just pay taxes on the difference from what it was appraised at at the time of inheritance and what we sold it for. So if we kept less than what it was appraised at would we still have to pay capital gains tax?
Your accountant is correct. When you inherited the property you received a step-up in basis equal to the fair market value at the date of death, which becomes your new cost basis. The capital gain would be the sales price, less selling costs, less your new cost basis. If you sell the property and allocated 3/4 to a 1031 exchange and 1/4 to a personal residence then the 1/4 that you pull out (cash out) would be allocated first to depreciation recapture (if any) and then to capital gain taxes. The first thing you need to look at is whether the 1/4 interest would recognize all of your capital gain of whether you still have additional capital gain that could be deferred by doing a 1031 exchange with the 3/4 remaining interest. But, your proposed transaction can be done provided you still have capital gain to defer.
You have an issue with the LLC and your sisters as well. The property held in the LLC would be one 1031 exchange because the multi-member LLC is considered to be a different taxpaying entity than the three sisters. The other property held by the three sisters would be a second 1031 exchange transaction. Each of the two 1031 exchange transactions could identify and acquire a percentage of the same property. You could also - provided you have plenty of planning time - contribute the second property into the LLC so that you now have one taxpaying entity to deal with, or you could deed the property held in the LLC out to the three sisters as tenants-in-common as well. There are complicated issues here that are not easy to explain fully in a discussion board post, so I highly recommend retainning a tax attorney.
I will email you my contact information if you would like to chat about your transaction.
[addsig]
Thank you, wexeter, I would appreciate chatting with you.