In this article, we are going to discuss the things you need to keep in mind when conducting a 1031 exchange in a community property state.
A 1031 Exchange Scenario
The help illustrate our point, let’s consider a 1031 exchange scenario. Assume we have a husband and wife (Eric and Mary) who want to conduct a 1031 exchange on their property. Eric and Mary own the relinquished property together. In a 1031 exchange it’s important that the same taxpayer (or taxpayers) who own the relinquished property acquire the replacement property. So Eric and Mary should both purchase the replacement property together.
However, what if Eric wishes to purchase the replacement property through an LLC? Does that still satisfy the same taxpayer requirement?
It really depends on whether the state in which Eric and Mary live is a community property state. If the taxpayers are in a community property state, this setup would work. In these states the LLC is viewed as a disregarded – pass through entity, with Eric and Mary as the taxpayers behind the LLC.
But most states are not community property states, but rather common law states. In those states an LLC would be considered a separate taxpayer, which would create a potential issue for a 1031 exchange. In this situation, Eric and Mary could either acquire the replacement property in their own names, or set up two separate LLCs and acquire the property as tenants in common.
CPEC1031
At CPEC1031, we partner with each and every one of our clients to provide the highest possible level of service. With more than two decades of experience in the realm of 1031 exchanges, we have the skills needed to help you through all the steps of your 1031 real property exchange. If you are interested in deferring taxes when you sell your next piece of real estate, contact us today at our office in downtown Minneapolis to chat with one of our professionals. We work with clients throughout the state of Minnesota and across the country!
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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