I sold my motel last year which qualifies for 1033.  The motel was owned by LLC1 (with only two members -- my husband and I).  I would like to close LLC1 now and form a new LLC2 (same members as LLC1) to take the title when we find our replacement property later.   Will this still qualify as an exchange?

In addition, since this is a commercial property with a business (trade?), does this mean we have three years instead of two years to complete the exchange?

Thanks,

 Jennifer

Hi Jennifer,

It depends.  Do you live in a community property state?  Click here to see a list of states that have community property laws.  Your proposed 1033 exchange structure of dissolving LLC1 that sold the relinquished property and creating a new LLC2 to acquire your replacement property with you and your spouse as the sole and only members will work as long as you are located in a community property state.  The proposed structure may not work if you are in a non-community property state because the LLCs with you and your spouse as the members will most likely be treated as a partnership and you would have to acquire your like-kind replacement property in the same LLC (LLC1) in order to ensure that your 1033 exchange qualifies. 

Thanks for the quick response!  Yes, we are in California so it is OK to use LLC2 for the exchanged property based on your reply.

 What about the time frame requirements for a commercial property with business operation such as motels?  Is it two years or three years?

 In addition, I remember you said in one of the posts that 1033 exchange doesn't now require you to maintain the same or higher debt ratio -- does thi mean we can cash out as long as the new property is the same or more in value with the old property?

Thank you again.   I am looking for a San Diego CPA who is experienced in 1031/1033 to handle our tax for last year.   Please let me know if you have any recommendations.

 Jennifer

Hi Jennifer,

You are in great shape since you are in California. The two limited liabilities companies are considered to be "disregraded entities" because you and your spouse are the sole members.  The property is actually considered to be held by you and your spouse since they are disregarded entities, so acquiring title under a difference LLC is fine as long as you and your spouse are the sole members. 

The time frame or deadline for a 1033 exchange depends on the type of 1033 exchange.  I am assuming that it was a condemnation via an eminent domain process where a city, state or federal government took your property, which means that you have two (2) years to reinvest from the date the condemnation occurred. 

The reinvestment requirement for 1033 exchanges is that you exchange into replacement property or properties that are equal or greater in value based on the net sales price.  It does not matter whether you reinvest your equity (cash) or have the same amount of debt.  You could increase your debt amount and keep some of the cash and not have to worry about paying any taxes (this is contrary to a 1031 exchange where you do have to reinvest all of your equity (cash)).  So, yes, you can pull cash out as long as your trade equal or up in value.

We also have a CPA firm in San Diego that we work with.  They are experts in real estate, including 1031 and 1033 exchanges. You can contact Aron Getty at Considine & Considine, CPAs, at (619) 231-1977. 

Best wishes.

Hi Jennifer,

I'm touching base to see if we answers all of your questions or if you need additional assistance.