Can Partners or LLC Members do Individual 1031 Exchanges?

Owning property in an LLC or an entity that is taxed as a partnership can be problematic when the various partners want to separately do 1031 exchanges. As a result, reconfiguring the ownership well before the sale might be advantageous. The best method of reconfiguration here is the tenancy-in-common model.

In a tenancy-in-common, you take those various individuals out of the partnership and deed them an undivided interest in the underlying real estate and have them hold that interest for some substantial period of time so that they can say they've held the property for investment or business and do a subsequent 1031 exchange on their slice of the relinquished property.

Coordinate with Your Team

That process requires coordination with your accountant, lawyer, financial planner, and the qualified intermediary because even if we break up as tenants-in-common but we still continue to report the asset as a partnership asset we may not have advanced the ball because we continue to conduct ourselves as a joint venture partnership.

Planning ahead is always a good idea and involving your accountant, lawyer, and intermediary early in the process can only benefit you.

Get Your Exchange Off the Ground

Considering the tax-saving benefits of a 1031 exchange? Contact a qualified intermediary today to work through the details of your transaction. Our intermediaries are well-versed in the process and can ensure that you defer 100% of your capital gains taxes – no matter where your sale is taking place. Contact us today at our office in downtown Minneapolis to get your 1031 exchange off the ground!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Acquiring 1031 Property as an Individual vs. Corporation

If I sell my property that was held in my individual name can I acquire my like-kind replacement property in my corporation? That’s our topic for conversation in this article.

Same Taxpayer Requirement

The short answer is no. Remember that the same taxpayer that sold the relinquished property needs to be the same tax payer that acquires the replacement property.

Oftentimes corporations are viewed as a separate or different taxpayer. They have their own EIN number, the stockholders may be the same as the owner of the relinquished property but they're probably not viewed as a disregarded entity or pass through for the purposes of 1031s.

Individual or Disregarded Entity

A more appropriate purchaser of the replacement property would either be the individual that owned the relinquished property or a disregarded entity such as an LLC that is wholly owned by the individual that sold to relinquished property.

• Start Your 1031 Exchange: If you have questions about corporations, stockholders, and 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges with Disregarded Entities

Consider the following 1031 exchange example we recently ran into with a client: The client and his wife were looking to sell a 4-plex held by an LLC that they both owned together (100%). They wanted to use those funds in a 1031 exchange to purchase another apartment, but with a different LLC name that they would also both own 100%. Would this be allowed under 1031 exchange rules since more than one person owns the entity?

Disregarded Entities

The same taxpayer that owned the old Relinquished Property must receive the Replacement Property to complete the 1031 exchange. The question brings up the issue of disregarded entities.

The IRS will only allow an LLC that is a disregarded entity (owned solely by a husband AND wife in a community property state, e.g., California) to be titled on the replacement property. Rev. Proc. 2002-69. In this case a multi-member LLC owned by you and your wife sold the Relinquished Property. It is not a disregarded entity.

The old LLC owned the Relinquished Property, and the old LLC should be the owner of the new Replacement Property.  You can do this by changing the name of the old LLC by filing a name-change amendment with the Secretary of State; or by having the old LLC be the sole owner of the new LLC (which would also have to be a disregarded entity).

Please check out this article on 1031 exchanges, LLCs, and married couples for more information.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges and disregarded entities, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

721 Contributions & 1031 Exchanges

Sometimes a property seller is interested in contributing a portion of his or her real estate into the project as equity, but also wants to take some cash out for a 1031 exchange. Here's a strategy to accomplish that.

721 Tax-Free Contributions

One way to structure the sale agreement is to have the taxpayer (seller) enter into two agreements with the buyer — typically an LLC taxed as a partnership.

• First, the taxpayer agrees to sell to the LLC an undivided X percent of the property for cash that will be assigned to a qualified intermediary for a 1031 tax-deferred exchange.

• Second, the taxpayer agrees to contribute the remainder of his or her interest in the property to the same LLC in a 721 tax-fee contribution in exchange of a partnership interest (LLC membership interest).

By splitting the transfers in two and doing the 1031 sale first, the taxpayer is able to get the most tax efficient treatment on both transfers.

Potential Complications

There are some potential complications if the LLC distributes cash to the members after the contribution, so you need to be careful when taking-out construction financing. Here are some issues to consider:

• What amount of debt — if any — encumbers the property at this time?

• What is the seller’s current adjusted basis in the property? (check for “MOB” mortgage over basis)

• What is the cash price allocated for the sale portion of the transaction?

• What is the value or amount of the LLC/partnership interest being given in exchange for the contribution or the remainder of the property?

Having a qualified intermediary on your side to tackle these issues can ensure the most tax-efficient strategy possible.

• Start Your 1031 Exchange: If you have questions about the 1031 exchanges combined with 721 contributions, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved