What to Know About 1031 Exchanges Involving LLCs

If you have a client who is a sole owner of an LLC that is doing a 1031 exchange, can you join the LLC after the client closes? Or can the ownership structure of an LLC never be changed once it’s been involved in a 1031 transaction? This is the topic for today’s article.

1031 Exchanges & LLCs

In this scenario, the 1031 LLC should remain a single-member LLC and not admit new members because it will change the “taxpayer” owning the Replacement Property.

Tenancy-in-Common

One option is to set up a tenant-in-common purchase on the Replacement Property with two co-purchasers: (1) 1031 LLC buyer; and (2) Non-1031 buyer; each with a proportionate ownership percentage based upon the money each contributes for the down payment. You will not want to file a partnership tax return for the joint ownership of the Replacement Property (so talk to your CPA). Also, you may want a tenant-in-common agreement between the owners (so talk to your attorney).  Further, you probably cannot have the tenant/renter pay part of the rent to one co-owner and part of the rent to the other co-owner, so you may want to have a management company to collect all of the rents, pay the bills for the owners and then distribute out incomes proportionate ownership percentages.

As always, it’s important to get legal and tax advice from your CPA and attorney.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How to Deal with Fees Associated with your 1031 Exchange Transaction

Many taxpayers who are in the middle of a 1031 exchange have questions about how to account for fees associated with the 1031 transaction. Specifically, can any of the following be included on the settlement statement?

• Lender Legal Fees

• Appraisal Fee

• Appraisal Review Fee

• Flood Certification

Fees that Cannot be Paid with Exchange Funds

On the closing of the replacement property certain fees associated with the new loan may not be paid with exchange funds without potentially triggering the recognition of gain (which would result in a failed 1031 transaction).

Any lender required expense ideally would be paid for out-of-pocket and not out of the 1031 exchange proceeds. These include:

• Lender Legal Fees

• Appraisal Fee

• Appraisal Review Fee

• Flood Certification

It is not a good idea to put these on the 1031 exchange closing documents. Pay these fees out of pocket, and keep your 1031 funds away from them in order to protect your 1031 exchange.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How to 1031 Exchange Contiguous Parcels of Real Estate

Recently, a client came to us with the following 1031 exchange situation. There was a single-tenant commercial building that the taxpayer was considering buying as the part of a 1031 exchange. On paper, the building consisted of about 8 condo units all owned by the same entity. But in person, it was one physical building with one owner and one tenant. If the taxpayer were to trade in this property, would they be limited to trade into only 3 of the condo units or could it be all one “purchase.”

1031 Identification Rules

Contiguous parcels of real property and condominium units are often regarded as “One” property for the purposes of the 1031 identification rules.

If the Replacement Property is one contiguous set of condo units that are all operated as one business unit and purchased from one seller at the same time, then it is one property for the purposes of using the three-property identification rule. Note, if you close on this Replacement Property within the first 45 days, then you do not have to designate or identify it in writing because you are deemed to have identified it by virtue of receiving it.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How to Effectively Use Your 1031 Exchange Proceeds

Is it possible to 1031 exchange your proceeds from a duplex into a single family home and then move into the home? Or do you need to rent the home first? That’s a great question, and our topic for today’s article.

1031 Exchange Requirements

In order to qualify for Section 1031, the new replacement property must be held either for productive use in a trade or business or for investment.

The U.S. Tax Court has said in a case called MOORE v COMMISSIONER, T.C. Memo 2007-134, May 30, 2007, that “personal use” such as a home or second home is antithetical to holding for the qualified purpose of investment/business. Renting the new replacement property for a substantial period of time would be prudent in order to satisfy the requirements for like-kind exchanges. See also IRS Pub 544 at page 12.

1031 Exchange Company in Minneapolis, MN

At CPEC1031, we work with clients across the United States on their like-kind exchanges of real estate. For the past twenty years our qualified intermediaries have been advising clients, preparing documents, and answer questions related to section 1031 of the Internal Revenue Code. Contact us today to learn more about our like-kind exchange services and set up an appointment to chat about your exchange. You can find us at our primary office in downtown Minneapolis.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How to Use Reverse 1031 Exchanges with Multi-Family Property

If you’re in the multifamily area, you know that the market is HOT and competition is fierce. If you’re trying to do a 1031 exchange, it may be advantageous for you to lock up a replacement property so you know you’ve got a sure thing to exchange into.

Your Options

You don’t want to be playing musical chairs, and at the end of your 45 day identification period have no chairs to land on. With that in mind, here are your options:

• Tie up the replacement property with a patient seller who will let you hold the property on the shelf so that once you sell your relinquished property you’ve got something under contract to roll into; or

• If the seller is impatient, and you have to close first on the replacement property, then do a reverse 1031 exchange. Have the qualified intermediary form an LLC to acquire the replacement property and hold it for you for up to 180 days so that you’ve got a sure thing waiting for you to exchange into.

Now paying for the property without the proceeds of the sale of your relinquished property can be a trick. That’s where working with your lender and having your cash lined up will make you the most competitive and capable purchaser to lock down a replacement property.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved