What's up guys, It's Clint Coons here.
And in this video, I want to talk about a 1031 exchange mistake
you might be committing when you buy replacement property.
Okay, let's get started.
Okay. This is the deal here.
When it comes to 1031 exchanges, there's a lot of information out there.
It gets bounced around.
Some of it's totally accurate and some of it is questionable,
which in turn leads people to make decisions that typically aren't
in their best interests.
When we think about asset protection planning
and most notably, what it comes down to is when you're buying replacement
property, how you have to take title.
Most individuals that I've dealt with that have come to me
always company with the same scenario, Oh, I talk to this person or I talked to my
a CPA or an attorney and they told me that I have to close
in the same entity that is selling the property.
And so what does that mean?
Well, for example, if I have a limited liability company,
this is actually a deal that I just dealt with this past week
with a client, a platinum client that came in, had a question, called me up,
and they have a California LLC.
They've had this limited liability company set up for 15 plus years.
It's done some transactions.
Inside of it is something I didn't set this one up and it's
one of those that we've had there that was part of their initial structure.
When they came to Anderson, I started working with them
that we just knew that, Hey, we got to leave it there
because of the nature of the beast
and we're not going to change it, but we'll eventually work out of it.
So they have this property that's inside of here,
and they're looking to do a 1031 exchange on this property
and buy replacement property, let's say, in Oklahoma.
So and this is where they're going to be replaced.
And they've identified the property there.
Now, the issue for this this client
that owns this property
is that they don't want the replacement property
to be owned in their California limited liability company.
And they were told that they had to close in the same entity
that is selling the property.
And sometimes this is referred to as down leg in Uplay
you have to close the Uplay property, which is the one you're buying,
has to close in the down leg owner, which is the LLC selling it
now that information is it is technically correct,
but it's not what you have to follow from a tax standpoint.
What we're talking about is closing the same owner we're looking at from a
from from the IRS perspective.
Is this the same owner, not legal owner but but tax owner?
That's what we're focusing on.
And people tend to conflate these terms
and they think, well, that means legal owner.
No, it's tax owner. That's the issue here.
So as I explained to them that when they dispose of this property here
and they find the replacement property that they're ultimately going to close on,
we don't need to close in the name of the California LLC.
They don't want to do that because there's issues with that LLC.
In fact, they want to shut the LLC down.
And so what where you can set this up is you can actually create a new limited
liability company for your new purchase in a 1031 exchange.
So you got a clean entity,
no pull over liability that could come from this existing any.
So you set up a brand new entity for closing purposes,
but here's what you need to make sure of that.
The owner, the member that is of this new
LLC is the existing LLC.
So this existing LLC will be the member of this LLC.
This LLC will be a disregarded.
So that's what I mean by for tax purposes,
it's the same owner because it's disregarded.
So on the tax return for this client, all this will flow back down to them
and it'll look the same on their 1040 this year.
So we're going to set up
California LLC, owns the Oklahoma LLC, it owns a new property.
And then next year what we're going to do.
So we're setting this up, we're going to close out
this limited liability company here and transfer
this LLC over to their Wyoming LLC and park it where it should be.
But we're going to wait a year before we do that.
So this is a way in which you can extricate yourself
out of an existing structure on your 1030 one's into a new LLC.
But the key is, is that the owner needs to match up, needs to be the same.
So you're going to have to set it up as a disregarded entity.
Now, if you had two individuals that are owning the property, well,
that's going to create a complication for us. It's not going to work.
I mean, you couldn't do one LLC, so it's not really quick.
I hadn't thought about doing this.
Let's see, we've got these two two investors,
they own title to this real estate.
They agree, hey, let's do a 1031 exchange on this.
We'll buy some replacement property.
So if they want to exchange out into an another building over here,
that's even in the same state, it doesn't matter.
They couldn't set up one LLC in both of them own it
because this is going to be a partnership. The only way this would work is
if they were husband and wife and they or spouses.
They lived in the community property state.
So if it's just two joint venture business partners
and they own it as tenants in common, which is how this would be held
if you wanted to give yourself asset protection in this deal,
what you would have to do is follow this.
This structure.
Here you would create two limited liability companies
as follows both of them disregarded back to the owner.
Okay.
And then the replacement property would be owned
as tenants in common between these two LLC.
And this is really an important strategy to consider
if you're doing a 1031 exchange
and you have a partner because now you have asset protection,
a lot of individuals that are in ticks, tenant in common agreements
that where they're going into replacement
property on a 1031 exchange, they're not told about this.
And so what happens is they end up taking title to property again
in that tenant common relationship in their own name.
And they are they're exposed, they have risk.
Whereas if you use a disregarded LLC for each partner, now you've minimize
your risk. You've taken that off your shoulders.
So 1031 exchanges, granted, they can be complicated, but knowing
your options on what you can do with them I think is really important.
You want to learn more?
Be sure to check out the show notes where you can set up a strategy session
with someone in our firm and we can discuss this.
If you're considering doing a 1031 exchange and
and help you look at your options as far as setting up an entity to exchange into.
Yeah, if you're not yet a subscriber to my channel, be sure to subscribe
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Take care.