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a question on 1031 exchanges

When is a property acquired for purposes of a 1031 exchange?

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Hello. I have a question on 1031 exchanges. 

A C-filing LLC owns a residential rental property. This property was owned by an individual, who created the LLC in 2015, then gave the deed to the corporation. If the property was originally acquired by the individual in 2009 for $150k and later given to the corporation in 2015, when was the property acquired for purposes of a 1031 exchange? 

To clarify, the corporation intends to purchase an investment property to avoid capital gains taxes. The current property can sell for around $250k. The LLC has filed 1120 since it was created, with around $3200 depreciation yearly.

Are there other alternatives to avoid capital gains tax, if the owner decides not to reinvest? 

Thanks in advance!

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Jorgen
By Jorgen Rex Olson
Jun 8th 2020 18:54

Hello,

On the first question, if the individual who originally owned the property gave the property to the LLC in 2015, and the LLC has always held the property for investment purposes, then there will be no issues regarding the holding period if the LLC tries to conduct an exchange. The fact that the original owner gifted the property to the LLC doesn't affect the issue of whether the "held for" requirement has been satisfied by the LLC. As long as the LLC has indeed held the property for investment since the time the property was received, then the held for requirement should be met. The gifting of the property by the original owner does present a gift tax issue, however.

On the second question, if the LLC sells the property and keeps the proceeds, then the only way to avoid capital gains taxation would be to use operating losses, or donate the funds to a qualified charitable organization, or use another legitimate method of tax avoidance.

Let me know if you need any clarification or have further questions.

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