Author Topic: Unusual 1031 Exchange question - can I sell my house to my company?  (Read 519 times)

Mr. Green

  • Handlebar Stache
  • *****
  • Posts: 1985
  • Age: 36
  • Location: Wilmington, NC
I have an LLC (sole proprietorship) in North Carolina that owns some land that we're about to sell. We close before the end of the year. I'm going to pay about 25k in taxes in the sale and I've been trying to think of ways to legally avoid/defer that tax payment to the future where our income will be lower, and we'd pay less tax as a percentage.

We own a townhouse in Maryland that up until recently was our primary residence. The house is now for rent through a management company. It has not been leased by a tenant yet. Could my LLC from North Carolina buy our townhouse? It certainly meets the definition of like-kind property. We intend to rent the townhouse out for a few years until we know more concretely if we'd ever consider moving back there. Having my company buy the house would also conveniently turn the house into a very cash flow positive property, instead of just covering the mortgage, taxes, insurance, etc.

We wouldn't end up paying more income tax on the profit since we'll be non-residents after this year, and Maryland will still require us to pay their higher income tax rate on rental profits. Since the LLC is a sole proprietorship I could basically dissolve it a number of years from now and the asset would become my personal asset, correct? I would only do that if we were planning on moving back in, and the tax would be due on the gains at that point but based on the current market value of the house I don't expect much in the way of gains, and the house is basically worth now what we paid for it back in 2006 so it's not like we're giving up the recovery of any loss by electing to "reset" the basis by selling it to my company.

Am I missing anything, and can we do this?

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1479
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Unusual 1031 Exchange question - can I sell my house to my company?
« Reply #1 on: December 13, 2017, 06:32:15 AM »
Some thoughts...

(1) Your LLC is a disregarded entity so it's not a different taxpayer. It is you. And you can't sell something or buy something from yourself.

(2) I'm guessing you'll use cash proceeds from sale of land to reduce the mortgage on the townhouse... hence the positive cash flow situation you end up with... that probably constitutes "boot" and "boot" is subject to tax in a Sec. 1031 exchange...

(3) If your LLC wasn't a disregarded entity but a separate taxpayer (like if it was an S corporation) you wouldn't technically be prohibited from using Sec. 1031 but there are related party rules which kick in.

Summing up, several potential problems maybe exist? I think it's a nonstarter. Sorry.

Mr. Green

  • Handlebar Stache
  • *****
  • Posts: 1985
  • Age: 36
  • Location: Wilmington, NC
Re: Unusual 1031 Exchange question - can I sell my house to my company?
« Reply #2 on: December 13, 2017, 06:39:42 AM »
Some thoughts...

(1) Your LLC is a disregarded entity so it's not a different taxpayer. It is you. And you can't sell something or buy something from yourself.

(2) I'm guessing you'll use cash proceeds from sale of land to reduce the mortgage on the townhouse... hence the positive cash flow situation you end up with... that probably constitutes "boot" and "boot" is subject to tax in a Sec. 1031 exchange...

(3) If your LLC wasn't a disregarded entity but a separate taxpayer (like if it was an S corporation) you wouldn't technically be prohibited from using Sec. 1031 but there are related party rules which kick in.

Summing up, several potential problems maybe exist? I think it's a nonstarter. Sorry.

Thank you! There was definitely a part of me questioning the viability of this. The thought occurred as I was falling asleep the other night and I wanted to run it out. I knew there was more to the rules of a 1031 exchange but it would have to pass this one first.  My company is not a separate tax payer so it can't be done. Don't know why I didn't consider that and see the obvious answer.