An Explanation of the 1031 Exchange Same Taxpayer Requirement

Let's say that you have a husband and wife (Mark and Sandra) doing a 1031 exchange.

Mark and Sandra own the old relinquished property. When they go to acquire the replacement property the same taxpayers that owned the old property should acquire the new replacement property. So in our example Mark and Sandra should purchase the replacement property so that when they report their taxes on IRS form 8824 they can show that they disposed of a relinquished property and acquired a new replacement property.

But what if Mark wants to set up an LLC to buy the replacement property? Will that LLC be deemed to be the same taxpayer as Mark and Sandra individually?

The answer to that question can depend on what state Mark and Sandra live in. If Mark and Sandra are in a community property state such as Wisconsin or California the common ownership of that LLC by Mark and Sandra will still be viewed as a disregarded entity - a pass-through – where the IRS sees Mark and Sandra as the taxpayers behind the LLC according to Rev. Proc. 2002-69. In this situation, both spouses also have to file a joint tax return.

Community Property States Include:

• Arizona

• California

• Idaho

• Louisiana

• Nevada

• New Mexico

• Texas

• Washington

• Wisconsin

In that case Mark and Sandra could buy the replacement property by and through that disregarded LLC. The problem is that most states are not community property states – they’re common law states. In those states a husband and wife are not considered to be a single member or owners of a disregarded entity. A husband and wife in an LLC could create and would create a separate and distinct taxpayer.

So in non-community property States the options for the taxpayers are either to:

• Acquire the replacement property in their own individual names - Mark and Sandra

• Create two new single member LLCs - one owned by Mark, one owned by Sandra - and have those two LLCs acquire the replacement property as tenants-in-common.

There’s still a continuation of investment by the same taxpayers, they’re simply bifurcating their ownership into two separate and distinct single member disregarded LLCs.

• 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

Remember the Same Taxpayer Rule When Conducting a 1031 Exchange

There are many rules and regulations to remember when exchanging property under section 1031. In this article, we are going to revisit the same taxpayer rule and the importance of abiding by it when conducting a 1031 exchange.

What is the Same Taxpayer Rule?

In essence, the same taxpayer rule is very basic. It states that the same taxpayer who sells the relinquished property in a 1031 exchange needs to acquire the replacement property.

That sounds simple enough on the surface, but there are a number of potential pitfalls that can result from this rule. For example, the taxpayer may own the relinquished property in their name and want to acquire the replacement property with their new spouse. Or, a taxpayer may wish to acquire their new property as an LLC.

The good news is there are strategies for approaching these scenarios. The taxpayer can set up a single-member LLC to acquire their property – this allows the taxpayer some liability protection while satisfying the same taxpayer rule. Another option would be to acquire the new property as a member of a tenancy-in-common.

Minneapolis Qualified Intermediaries for 1031 Exchanges

Are you thinking about availing yourself of the tax-saving benefits of a 1031 exchange? If so, you’ve come to the right place. CPEC1031 has been helping taxpayers with their like-kind exchanges for more than two decades. Our qualified intermediaries bring that level of experience to each and every exchange we facilitate. When you work with us, we guide you through the entire 1031 exchange process and make sure you have all of your bases covered. Contact us today at our Minneapolis office to chat with one of our 1031 exchange professionals.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Same Taxpayer Requirement in a 1031 Exchange

In this 1031 FAQ video, Jeff Peterson talks about the same taxpayer requirement in a 1031 exchange. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about same taxpayer requirements in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved