Situation: Individual taxpayer owned investment real estate (land - Prop#1)). Taxpayer owned a different rental busines property in an LLC. Bank required Prop#1 to be used as colateral on loan for LLC property. Attorney, for some reason, transferred title of Prop#1 to name of LLC instead of just using as colateral in owner name. Husband and wife owns LLC together and reports rental on Sch E.

Now, taxpayer wants to sell Prop #1 in a 1031 exchange with the replacement property being farm land that will hold several years, then possibly convert to primary residence.

Prop#1 is not needed as colateral any longer. Should the taxpayer transfer the property back to personal name or leave it in LLC name?

Would there be any gain from appreciation (like in a corp)? There was no intent to transfer ownership to the LLC. I am afraid if wait to transfer title if ends up building primary residence on property, that there will be gain on transfer at that time since they will definately need to transfer title.

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If the atty made an error, then have the atty fix it.

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>>Attorney, for some reason, transferred title<<

"I thought I was just signing the kids' allowance checks. That doggone lawyer must have slipped the deed in when I wasn't looking."

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They knew what they were signing, they just did not realize that it could create a problem. I am just trying to determine if we can get around the "problem" by transferring the title back to individuals since it is no longer needed for collateral and it was never put on the company books.

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>>a 1031 exchange with the replacement property being farm land that will hold several years, then possibly convert to primary residence<<

Since they intend to violate the most fundamental requirement for 1031 treatment, that the property be held for business or investment, I would recommend they comply in as much detail as possible with all the other requirements.

First, they should update the company books to reflect the member contribution of the property. Then they should either transfer it back and wait two years before the 1031 exchange, or do the exchange from the LLC and wait two years before transferring title to themselves.

Section 1031 is one of the few sections of the tax code in which form is more important than intent.

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"...have my cake and eat it too."

First, it's the intent (when TP acknowledges he may want to move into/onto the replacement property in a few years) and then it's the form (when the LLC has title instead of the TP).

Jainen *can* have his cake and eat it too.

"Form" = eating the cake; "Intent" = having it, too!!

Or is it the other way 'round?

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I truly understand about "having the cake and eating it too"; we all like to to this.

However, how about the other question. If and when they transfer title back from the LLC, whether it be now or later, is their a gain on the transfer as if it is a sale, resulting in a taxable gain on the appreciation in FMV. Sad part it, this property was obtained as gift of family property which has very little basis.

Maybe they should go ahead and do the exchange through the LLC with one modification. If there is even the slightest chance that they will use a small portion of the land to build personal residence on, may they should segregate that portion as a separate personal purchase, not including it in the exchange. (Then they would only be eating part of the cake)

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The distribution of the appreciated property from the LLC to its members is simply a distribution from a partnership to its partners. IIRC, that's not taxable unless the amount of the distribution exceeds the partners' tax basis in their partnership interests.

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>>they should segregate that portion as a separate personal purchase<<

Section 1031 is very flexible in that regard. They do not even have to use "a separate personal purchase." Just show that amount of value as boot.

But 1031 is much less flexible concerning how title is held. For that, you need a rather technical discussion with an EXPERIENCED exchange facilitator or real estate attorney. By that word in caps I don't mean somebody who can answer your question without having to look it up. I mean someone who knows where to look it up.

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