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Old 02-18-2014, 01:58 PM
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1031 question

My family has a C-corp that owns an interest in an LLC. The LLC owns farm ground. If the C-corp sold it's interest in the LLC, can the C-corp take 33% of the proceeds and do a 1031 exchange into another property via the creation of another LLC? Or does it have to reinvest 100% of the proceeds?

Rough example: the C-corp becomes a 25% partner in the LLC by investing $100,000 & the LLC buys $400,000 worth of farm ground. The C-corp wants to sell it's interest in the LLC for $300,000 ($200,000 in LTCG) but wants to take $100,000 of those proceeds and reinvest into another LLC to buy more farm ground.



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Old 02-19-2014, 05:03 AM
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Originally Posted by MFinMO View Post


#1;My family has a C-corp that owns an interest in an LLC. The LLC owns farm ground. If the C-corp sold it's interest in the LLC, can the C-corp take 33% of the proceeds and do a 1031 exchange into another property via the creation of another LLC?



#2;Or does it have to reinvest 100% of the proceeds?

Rough example: the C-corp becomes a 25% partner in the LLC by investing $100,000 & the LLC buys $400,000 worth of farm ground. The C-corp wants to sell it's interest in the LLC for $300,000 ($200,000 in LTCG) but wants to take $100,000 of those proceeds and reinvest into another LLC to buy more farm ground.
#1;I guess it depends.The C corp’s PS interests ain LLC are specifically excluded from 1031 ex.treatment. PS interests are personal property, and are not considered to be like kind to the acquisition of pty. However, with proper advanced tax planning, partners can restructure their ownership position so that they could qualify for a future 1031 Tax Deferred Exchange transaction involving the underlying pty held in the PS entity.

however, interests, however, in biz entities,i.e., partnership interest, shares of a corporation or membership interests in an MMLLC do not qualify for 1031 tax deferred exchange treatment, even if those business entities manage or hold investment real property.


Note;to claim a 1031 exchange doesn’t relieve the LLC of its cg tax burden on the faarm ground. it only defers it until the new pty involved in the exchange is sold. At that time, the tax deferred by the 1031 swap will come due. There is no amortization method to pay down gains taxes while holding onto the new like-kind property.




#2; all cash proceeds from the sale of the relinquished pty must be reinvested in the replacement pty to avoid recognized taxable gain from the exchange;aslongas you trade up, and all the cash is reinvested, no taxable boot. But if you trade down, and all the cash is not reinvested, the net cash back to you is treated as cash boot received and recognized as taxable gain on your return.However, there is an adjustment to cash boot received not realized by many when the exchange is originated and in the planning stages. Selling expenses,i.e., commission, recording fees or etc paid in connection with a 1031 exchange are treated as cash boot paid and offsets any boot received. This means you can trade down by the amount of your selling expenses paid and still have no recognized gain. For example, assume thatYou sell your relinquished pty and the cash proceeds total $135k. Your selling expenses total $32k of which you paid $10k outside of escrow. The balance of the selling expenses or $22k was paid through escrow and the net proceeds of $113k are paid into your trust account. At this point, your net cash boot received is $103k and this is the amount you need to reinvest to avoid net boot received and taxable income.



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