1031 Exchange under an LLC

[Matthew Heffernan]

I'm trying to help a friend defer capital gains tax in Michigan.

He is selling a business and the real estate to a single buyer, however the property is owned separately under an LLC, which will remain in the Sellers ownership going forward.

Does 1031 exchange limit the exchange to commercial only?  Could a vacation rental property be purchased in exchange for the business/commercial property being sold?

Thank you!

[Wendy Patton]

@Matthew Heffernan I have a good 1031 exchange company in MI if you want to reach out - but your statement above is confusing. You said that the seller is selling the busienss and the real estate to a single buyer but you said the real estate is owned by an LLC and that he is going to remain in ownership. So is he selling it or not? yes with the real property he can do a 1031 exchange if he buys another "like kind" with the same LLC BUT i am not an attorney or a 1031 expert. I do have one in MI if you need it. I hope this helps a little bit

[Jeff Nash]

I’m a little confused by the fact pattern as well so please clarify as noted by @Wendy Patton. Depending on the nature of the transaction, an important concept is the same taxpayer rule -the relinquished property and replacement property must be in the name of the same taxpayer which seems simple enough on the surface, but there are some nuances and technicalities. If say real property was held by and used in a trade or business was commercial property titled in and used by the business (disregarded LLC reported on a Form 1040), and you wanted to reinvest in replacement property consisting one or more residential properties (SFR, multi-family, etc) in that disregarded LLC or even in the single member's name, that would be permissible because they are the same taxpayer. As I noted in this example real property is defined rather broadly. Commercial property exchanged for investment residential property is fine. @Whitney Nash would be good to elaborate or discuss with you and/or your friend. 

[Dave Foster]

@Matthew Heffernan, It sounds like the LLC will be the entity doing the 1031 exchange. The LLC will sell the real estate and the LLC will buy the replacement real estate. Your friend retains the ownership of the LLC. But the LLC does the actual 1031 exchange. It might be even easier than that if the LLC is a disregarded entity that does not file a tax return.

Your second question is regarding the rules of like kind and qualified use.  Any type of real estate used for investment can be sold and replaced by any other type of real estate as long as the intent is to hold that real estate for investment.  So a move from commercial to vacation rental is perfectly fine.

[Matthew Heffernan]

@Dave Foster  Yes you nailed it in your summary.

Thanks all for your responses!