Transfer former residence to LLC?

[YHD]

We moved out of our first house and shifted our homestead exemption to our current house.

The first house is paid for and vacant since December 2022. Am exploring moving ownership to an LLC to establish as a rental then use a 1031 to purchase a vacation house in two to three years.

How can we do that?

[popoki]

How do you get insurance on a vacant house?

[Nate79]

We moved out of our first house and shifted our homestead exemption to our current house.

The first house is paid for and vacant since December 2022. Am exploring moving ownership to an LLC to establish as a rental then use a 1031 to purchase a vacation house in two to three years.

How can we do that?

Do you mean a vacation house that you would personally use?

[YHD]

I would like to exchange the first house for another to be purchased in 3 years.

Considering transfer to LLC then a 1031.

If that is not IRS compliant, what are other options.

[5outof10]

I am not a 1031 expert but I don't think you could sell your old home now and purchase the vacation home 3 years down the road.

Also, how are a vacant residence and a future vacation home like kind property?

I am not sure of these answers but just things that popped into my head.

[SuzBanyan]

I would like to exchange the first house for another to be purchased in 3 years.

Considering transfer to LLC then a 1031.

If that is not IRS compliant, what are other options.

A couple of thoughts.

First, the question about forming an LLC is a bit of a red herring. You can own an investment property and complete a perfect 1031 exchange even if held in your own name. The LLC can be helpful to limit your liability to strangers to just the property value. If you need financing, it probably won’t limit your liability to your lender. But if your meth house operating tenants blow up the neighborhood, it might limit your liability so that you lose that house and not any of your other assets.

Second, if this house was you current residence until 2022 (and otherwise meets the exclusion requirements), the best tax option may be to sell and exclude up to $500k (if married) of the gain as the sale of a personal residence. You need to sell within 3 years of moving to the new residence.

Finally, a 1031 allows you to exchange one investment property for another investment property which you intend to hold long term. While things change and those intentions can change, it is imperative that the target property be acquired with the intent to hold it as an investment (usually short or long term rental) for the foreseeable future.

[Sandtrap]

I would like to exchange the first house for another to be purchased in 3 years.

Considering transfer to LLC then a 1031.

If that is not IRS compliant, what are other options.

1
Per IRS, there is a "short" time window between the sale and purchase of "like properties" for a 1031 exchange.
2
Double check with either/or; R/E legal counsel, CPA, (not realtor) for what can and can't be done to your advantage with an LLC, and for this transaction. You don't want to "paint yourself into a corner" with only your own research, etc.
3
An LLC is often "advertised" as a "thing to have" for many things by non-expert professionals. It is not.
IE: Also often touted as liability protection....not always. It depends. (IANYL)
4
Sometimes getting "over creative" with R/E transactions raises an audit "red flag" to the IRS.

So, "due dilligence", seek professional counsel.

j

[TheAccountant]

An LLC means limited liability from other members of the LLC. It doesn’t mean you can register an LLC and then gain some magic umbrella liability protection that didn’t exist beforehand. There are other benefits that may or may not be applicable to your situation, but that’s a conversation you need to have with the proper counsel and not on a Bogleheads investing forum.

[cchrissyy]

I don't think the decision to change ownership to an LLC has anything to do with a 1031 exchange or your decisions about renting

[123]

Are there any capital gains that can be harvested if you sold the former residence? As long as it was your primary residence for 2 of the prior 5 years potentially you can exclude $500K (if jointly owned) of capital gain. If you want to be a landlord sometimes it can make sense to sell a prior home, harvest the tax gain, and buy another property for rental with the proceeds.

[YHD]

There are several moving parts:

1) we insure it as a second home. It is 1.5mi from our current residence. We mow grass , still have stuff in it and harvest plants for transplanting to the new house

2) we are considering purchasing a pied a terre in NYC. We have a mortgage on our primary residence which we are retiring in the next two years. Qualifying for coop board approval on an NYC purchase will be easier if we don’t have the real estate taxes and insurance expenses on our current second home.

3) I thought that we could put the the second house in an LLC where ownership is under a separate entity. Could a trust accomplish this as well?

4) selling the second house will realize a capital LOSS. We don’t need the cash from the home sale immediately. I thought a business entity would be able to use the capital loss more efficiently

5) yes we are consulting legal and tax pros not just well-informed but still random internet strangers. Although your perspective is valuable as a starting point for discussion with pros.

Thanks for reading this far. There is no tl /dr

[life_force_prana]

There are several moving parts here that you are referencing so hard to cover all aspects. A few thoughts:

1) LLC will help with liability, and could limit refinancing but doesn't matter either way for 1031 exchange
2) Using the 1031 exchanged property as rental will be needed for atleast two years and if short term rental then you have to satisfy two weeks of year
3) Changing your intent on a 1031 exchanged property and making it primary to claim 121 deduction can be tricky and you may want to seek advice
4) try https://www.therealestatecpa.com/, these guys are experts in real estate accounting and strategy matters

[SuzBanyan]

If your current property will sell for a loss, a 1031 exchange down the road likely makes no sense, especially if it means having to rent out both the current property for at least 2 years and then the replacement property for at least the same amount of time. Just sell the current property and buy what you want for personal use in the future.

As a general rule, it is almost impossible to sell the tax benefit of an existing but unrealized non-deductible loss to another personal or entity. What a new business entity might benefit from is future losses. But in addition to actually having to incur those additional losses, they may be of little value until some time in the far future when you eventually sell the replacement property.