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 so you'll get notified of content
as I produce it on a weekly basis. Take care.
