1031 Help

[Oh Baby!]

I know 1031 has been discussed a million times here, but I searched the board and di not see my specific question addressed.

Client Sells a property (which was owned by his LLC #1). LLC #1 then takes the proceeds and distributes it to LLC#2 which is fully owned by LLC#1. LLC#2 uses the funds to purchase a property a complete the 1031 exchange.

An intermediary has been involved and all is documented properly.

Here's where it gets confusing.

When LLC#1 sold the property it had a deferred gain of $1,000,000 of the sale of a property for $2,000,000.

LLC#1 did not send the whole $1,000,000 to LLC#2. It sent $500,000. LLC#2 then used the $500,000, together with mortgage to purchase a new property for $2.5m, this way completing the 1031 exchange.

ON the books of LLC#1 I have a deferred gain of $1M. HOw am I reducing that when the exchange is complete?

Right now I have it as no deferred gain and a negative investment in LLC#2 for $500,000 ($500,000 actually invested - $1,000,000 deferred gain = -$500,000).

Is this correct? can anyone shed some guidance?

[mircpa]

in LLC#2 buying cost of like kind property is 1.5 Mill (2.5 Mill purchase price - 1 Mill deferred gain). In 1031 exchanges deferred gain from sale of relinquished property will SHORT purchase price of newly acquired property.

[Lee B]

Perhaps I'm not reading this correctly, but how can this be a 1031 exchange if LLC # 1 has direct access to the proceeds.

[Lion EA]

And, don't both properties have to be titled in the same name?

[mircpa]

It could be that those are single member LLC's which is disregarded for tax purposes. Since there was intermediary involved, I am guessing taxpayer did not have access or control to funds