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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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I'd like this question to go to "Richard only" since he

Customer Question

I'd like this question to go to "Richard only" since he has helped me many times in the past and has spoken specifically on this issue. In preparation for a future sale of some real estate, I asked Richard to explain to me the nuances of a 1031 like-kind real estate transaction. I have now accepted an offer to buy my office building in Memphis with a closing date of June 21, 2016. I'd like to invest the proceeds in rental property in Nashville within the timeframes allowed for a 1031 like-kind exchange. My question concerns the ramifications of changing the ownership from a 50-50 Partnership with my wife to an LLC. Is this allowed with the 1031 exchange or will this trigger a change of ownership taxable event? My wife seems to think that we may avoid some future transfer tax if she includes our children as non-voting members of the LLC. Is she wrong? Finally, if going from a partnership to an LLC is a taxable event and we decide not to set up an LLC with this 1031 exchange, can you comment of the benefits of an LLC and suggest who should be members in our circumstances? Thanks! (Any cautions to be aware of in LLC's will also be appreciated.
Submitted: 5 months ago.
Category: Tax
Expert:  Tax-Scholar replied 5 months ago.
Welcome to Just Answers! I wanted to add my expertise to this discussion and will defer to Richard. 1) In order to accomplish the 1031 you'll need to use a Qualified Intermediary. They will close on the sale of the office building and then invest the cash in replacement property. The closing statement must list a QI as the seller and not the Partnership. This is called a deferred 1031 exchange. 2) I would avoid converting to a LLC mid-stream (i.e. after the initial sale in June but before closing on replacement property) 3) The conversion should be easy enough. Just need to file some paperwork with the secretary of state. 4) The conversation is tax and is treated as liquidation of the Partnership followed by a contribution to the LLC. This is tax free and no need for an EIN. This conversation does not terminate the partnership for tax. There is not short year return and the methods of the old partnership continue on with the LLC. Note that LLCs are taxed as partnerships when there is two or more members. 5) Will your children be able to purchase LLC interest from you or will they be gifts? Note that a gift tax return could be required. The LLC will not be considered a family partnership. 6) I'm not familiar with TN transfer tax. I"ll let Richard answer this. Good luck. Just wanted to help no need to accept answer. I'll also add that all of this is complex and you'll want to work with a CPA to accomplish this. I would not recommend making gifts and doing a 1031 withouth the help of a CPA.
Customer: replied 5 months ago.
Thanks this information is very helpful!
Expert:  Tax-Scholar replied 5 months ago.
Your welcome. Is there anything else I can help with as it looks like Richard has been offline for several days now?

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