THE REVERE ADVOCATE – FRIDAY, JUNE 17, 2022 Page 11 1031 EXCHANGES AND LIMITED LIABILITY COMPANIES Revere Firefi ghters are shown saluting during the playing of taps. State Senator Lydia Edwards thanked fi refi ghters for serving. Internal Revenue Code Section 1031 allows an investor of real estate to sell his or her property at a substantial gain and replace that property with like-kind property within a certain period of time in order to defer paying capital gains taxes. The Investor must use a qualifi ed intermediary to handle the transaction from beginning to end. The deferred capital gain serves to reduce the cost basis of the replacement property for purposes of a later sale and for purposes of calculating depreciation on the replacement property. Form 8824 is used to report the “like-kind” exchange as part of your 1040 or entitylevel return. A single member LLC can Bugler Stephen White and bagpiper Daniel Norton played taps. enter into a 1031 exchange as well as a two or more member LLC. A single member LLC is transparent for tax purposes. No separate tax return has to be fi led. If you are a self-employed individual operating as a single member LLC, you would simply report your income and expenses on Schedule C. If you own rental real estate titled in the name of a single-member LLC, you would report the rent income and expenses on Schedule E. If, however, you operate as FOREVER IN THEIR HEARTS: Shown from left to right: Russell Vitale’s wife of 50 years, Beverly Rogers, his sister, Elaine Bougiouris, and brother-in-law, Kyriacos Bougiouris, held a memorial plaque for Russell, 84, who served on the department for 21 years. He passed away on Nov. 18, 2021. a two or more member LLC, you must fi le Form 1065, U.S. Return of Partnership Income. You can also choose to be taxed as a corporation and either choose regular C Corporation status or S Corporation status. In Massachusetts, a common law state, a husband and wife that are 50% owners of a limited liability company must fi le Form 1065. In community property states, a husband and wife are considered to be one owner and therefore do not have to fi le Form 1065. Even if you owned a rental property just in your name, you could title the replacement property in the name of a single member LLC and still take advantage of Internal Revenue Code Section 1031. The single member LLC is disregarded for tax purposes. For a two or more member LLC, the 1031 exchange must take place at the entity level. The LLC would sell the rental real estate that it has title to and would title the replacement property in its name as well. The LLC would fi le its own Form 8824 to report the sale, deferred gain, any recognized gain if the full selling price was not reinvested, etc. A safe harbor holding period of the replacement property in order to secure the validity of the 1031 exchange is two years. Three years would be even better. There often are complexities when one or more of the partners do not wish to remain invested in rental real estate and would simply rather cash out and pay the tax. In that event, the partnership would look to into formulating a tax strategy that would accommodate the partners wishing to remain invested and wishing to defer the recognition of gain and the partners that wish to cash out can pay the capital gains tax on their share of the capital gain. Taking advantage of the 1031 exchange can save a signifi cant amount in capital gains taxes and it should not be overlooked. Joseph D. Cataldo is an Estate Planning/Elder Law Attorney, Certifi ed Public Accountant, Certifi ed Financial Planner, AICPA Personal Financial Specialist and holds a Master’s Degree in Taxation. For Advertising with Results, call The Shown from left to right: Barry Johnson, Robert Fortuna and Firefi ghters Local 926 Union President Kevin O’Hara by the Firefi ghters’ Memorial. or Info@advocatenews.net call The Advocate at 781-286-8500 dv cate Ne Newspapersspapers
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