Question on 1031 exchange

You will need to make the exchange before you put the property into the LLC, but that should work, yes.

If you use an LLC, be careful. You can elect that an LLC be taxed as a C-corporation or an S-corporation. Otherwise it is ignored and taxed as if the LLC didn't exist (for most purposes).

It is not normally a good idea to have real estate in an entity taxed as a corporation.

If you are worried about liability, with an LLC you can still lose your entire investment. The best protection is a good liability insurance policy. If you want an LLC on top of that, do it. But don't use the LLC as the primary protection.

If it's a two member LLC, isn't it taxed as a partnership? Are there special rules if the partners are married to each other?

taxed

Normally, yes. But taxed as a partnership still means that it's not a recognized entity. The partnership is mostly about reporting rather than how anything is actually taxed. Also, not all ventures of more than one person are required to be taxed as a partnership.

other?

I haven't looked this up lately, but my understanding is that if they file a joint return, a partnership return is not necessary.

The point is that being taxed as a corporation (C or S) can diminish whatever tax benefits there may be when owning real estate. Being taxed as a proprietorship or as a partnership does not involve that same issue.

Under certain circumstances a husband/wife (I guess that should now be spouse/spouse) partnership can elect to split the partnership income without filing a partnership return, but if they form an LLC, the partnership (or other entity) return is required.

Ira Smilovitz

The OP didn't say what state they are in. In a non-community property state a husband and wife LLC has to file as a partnership. In a community property state, if the spouses own a two-member LLC as community property, they have the option to treat it as a disregarded entity instead of as a partnership.

Rev. Proc. 2002-69 section 4.01: "If a qualified entity (as described in section 3.02 of this revenue procedure), and the husband and wife as community property owners, treat the entity as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is a disregarded entity for federal tax purposes."

Bob Sandler

Why would it make any difference in a non-community property state? If they file a joint return it should work out the same both ways, so why bother filing a partnership return?

I'd think it'd make a difference when one of them dies, if it's held as joint tenants, so the survivor owns 100%, or as tenants in common, so the decedent's share goes into his or her estate.

For annual taxes, I can just barely imagine a situation where one of the spouses has a large Sched C loss from soemething else, and it'd affect how much of the LLC income it could offset, but I admit it's a stretch.

I may be wrong as I am not a lawyer, but my understanding is that an LLC is a state created entity. Once created it must file a tax return and is not eligible for the marital "partnership" exclusion. It isn't a matter of community property vs. non-community property.

Ira Smilovitz

I'm not a lawyer either, but apparently the IRS thinks that community property makes a difference. I don't know why.

"Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election [to not be treated as a partnership]. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states."