LLC 1031 exchange after divorce

Member since 2023 · 4 posts · 1 vote

My wife and I have an LLC. We divorced last year. We are in a community property state. The rental proceeds have been claimed as regular income on our 1040's. We want to sell one of the two remaining properties in the LLC and each do a 1031 exchange. We have owned the property for 39 years. It has been in the LLC for 10 years. The exchange company says we cannot do that unless the sale property is titled in each of our names, not the LLC. HELP!

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Randy Wieland, Husband/wife LLCs in community property states can be considered to be single member LLCs or a disregarded entity for tax purposes. The 1031 company you talked to may have missed this.

If your LLC does not file it's own tax return then all activity of the property was reported on your personal joint tax return. To do a 1031 exchange the tax payer must be the same from the old to the new property. If your LLC is a disregarded entity then you can sell as the LLC and buy in your individual names. The divorce decree will speak to the disposition of the property and the IRS will honor that. To sum up, if the LLC is a disregarded entity then you can sell as the LLC and buy in your names using the 1031 exchange. That's one option the 1031 QI missed.

The other option the 1031 QI you talked to missed was the option to "drop and swap". Immediately before sale you dissolved the LLC and distribute the property to each of the former members as tenants in common. Again, the divorce decree will support this. And the IRS will honor it. Immediatley after the quitclaim you and your ex will sell the property. And each of you can go your separate ways - one can 1031 and one can take cash. Or both can do their own 1031s.

If the LLC is not a disregarded entity then you do have an issue in that the LLC must sell and buy. But again, the option of a drop and swap should have been discussed with you.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Randy Wieland, Husband/wife LLCs in community property states can be considered to be single member LLCs or a disregarded entity for tax purposes. The 1031 company you talked to may have missed this.
If your LLC does not file it's own tax return then all activity of the property was reported on your personal joint tax return. To do a 1031 exchange the tax payer must be the same from the old to the new property. If your LLC is a disregarded entity then you can sell as the LLC and buy in your individual names. The divorce decree will speak to the disposition of the property and the IRS will honor that. To sum up, if the LLC is a disregarded entity then you can sell as the LLC and buy in your names using the 1031 exchange. That's one option the 1031 QI missed.

The other option the 1031 QI you talked to missed was the option to "drop and swap". Immediately before sale you dissolved the LLC and distribute the property to each of the former members as tenants in common. Again, the divorce decree will support this. And the IRS will honor it. Immediatley after the quitclaim you and your ex will sell the property. And each of you can go your separate ways - one can 1031 and one can take cash. Or both can do their own 1031s.
If the LLC is not a disregarded entity then you do have an issue in that the LLC must sell and buy. But again, the option of a drop and swap should have been discussed with you.
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Randy Wieland
OP
Member since 2023 · 4 posts · 1 vote
3y
My understanding is that if the LLC has more than one member, as ours does with both husband and wife, that it is a partnership and not a disregarded entity. Am I mistaken in that understanding? Or does your first paragraph address that reality sufficiently? Thank you!!!!!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Randy Wieland, There are two things working here.
1. Your election when you set up the LLC. If you elected to be taxed a sold proprietor then the LLC does not file it's own tax return. All activity of the property is reported on your personal tax return. This make the LLC a disregarded entity and you personally are actually the tax payer. Which is why you can sell as the LLC and buy as yourself. It does not change where the property is reported. It does not change the tax payer.
2. In a community property state a husband and wife can be considered "one" member for purposes of forming an LLC. Husband/wife LLCs in non-community property states do not have this option. They would be considered two members and the LLC must file its taxes as a partnership.
Conclusion - if you and your wife formed an LLC in a community property state and elected to be taxed as a sole proprietor then your LLC could be a disregarded entity and you have multiple options that 1031 company you talked to missed. Even if not there are options that the other company missed.
I sent a colleague request and some resources to you if you'd like to discuss your options further.
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
Randy,

Because your current choice of QI says they can’t help you. Why not switch to Dave, the QI that says he can help you? Stops you from paying one company while the other one does all the work.
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Randy Wieland
OP
Member since 2023 · 4 posts · 1 vote
3y
Quote from @Bill B.:

Randy,

Because your current choice of QI says they can’t help you. Why not switch to Dave, the QI that says he can help you? Stops you from paying one company while the other one does all the work.

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Randy Wieland
OP
Member since 2023 · 4 posts · 1 vote
3y
Yup. Totally considering that.
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