1031 Exchange - Dissolving LLC and Reinvesting the Funds Personally
Greetings - looking for some guidance on a situation:
Currently myself and 2 other business partners own a property in an LLC (33% ownership each).
We will be selling the property for roughly $4M, and then dissolving the LLC following the sale. For simplicity sake, lets say the sale nets $1M total or ($333k each) before capital gains taxes and recaptured depreciation.
My question:
Is it possible to take my portion of the proceeds ($333k) and reinvest it into another property on my own via a 1031 exchange? I know typically that title to the new property would remain with the existing LLC, however since we will be going separate ways and dissolving the LLC, I am trying to find a way to avoid the capital gains and depreciation recapture for myself personally.
If it is in fact possible, how does title work for the new property? Along with the purchase price and debt requirements on the new property?
Thank you in advance!
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#1 1031 Exchanges Contributor
- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
@Sean Williams, If all the partners are OK with each doing their own 1031 as well then it's an easy matter for the LLC to do the exchange. And after the properties have been purchased the LLC is dissolved. And the properties distributed into each of your names as tenants in common. This is called a Swap and Drop". The LLC does the exchange and then is dissolved. It works but it's unwieldy becuase the LLC has to worry about the value of each replacement equaling the members ownership %. and debt is very tricky to place since it is first the LLC that is purchasing the new property.
An alternative called the drop and swap is coming into favor. In this the LLC is dissolved right before the sale and the property is put into each of the former member's names as tenants in common according to your % of the LLC. Then upon sale each of you can do your own 1031 on the property you own as yourself. This is a process that has had to grow on the IRS. But there have been several rulings in recent years that support it. And it could work quite nicely for you.
I've got a new print resource I'll get to you via pm. ONe of the chapters is specifically on this process and the case law surrounding it.
Thank you Dave, this is exactly the information I was looking for...the Drop and Swap founds interesting, I'll check out your resource and dive into it. I'll be in touch, thank you!
Have you considered exchanging into a DST?
Hi Dylan - thank you for mentioning this, I think that is something we would pass on. But great idea/option!