Complicated 1031 Due to Property Being Held in LLC

[Christian Nachtrieb]

Hello, I'm hoping someone here can point me to a seasoned & experienced tax professional who could help advise me on the best course forward with my 1031 Exchange I'm in the middle of. Details of my situation below...

My wife & I are currently in the middle of a 1031 Exchange where we're selling a condo in Boston and using the funds to purchase a triplex in Worcester. We're at the point where P&S has been signed by all parties of both transactions, and we've been approved for a mortgage by Salem Five. All is well & good on that front. The issue is that the relinquished property in Boston is held in our partnership LLC, and in order to satisfy the 1031 Exchange requirements, we *MUST* close and take title under the same name on both the buy & sell side. However, the mortgage is not a commercial product and thus requires our personal names be on the title of the acquisition property.

Here is the question I am trying to solve:

If we quitclaim the deed of our relinquished property in Boston to our personal names to satisfy the bank and the 1031 rules... what, if any, tax implications will this have and how do we maneuver that?

Thanks all for your help!

[Lien Vuong]

Yes, you can quitclaim that prior to closing and it'll satisfy the bank. If you filed taxes on that property under ABC LLC you still can issue the K1s and state that there was a sales event. Your CPA should be able to tell you implicitly on any tax repercussions on that.

Source: I separated a multi-owner LLC building prior to closing to exchange into a property I own solely.

[Bill B.]

Do you have a QI in place? If so they should be able to answer your questions virtually on the fly. If you don’t. Reach out to @Dave Foster and use his company. He’ll have an answer. 

Ps. I assume this/these aren't disregarded LLC's? (The 1031 requires the same tax payer on both sides, not the same name.) If the LLC doesn't file it's own taxes you can simply buy in your own names.

[Dave Foster]

@Christian Nachtrieb, What you're referencing is what is called a "drop and swap".  Where right before the sale happens the property is quit claimed into the members personal name as tenants in common.  

distributions from an LLC are generally not taxable events. They retain your membership interest in the LLC. But reduce your capital account.

The only potential problem is a very old and changing interpretation of the validity of doing this when performing a 1031 exchange.  The potential issue is documenting your intent.  It's easy to document that Crane has owned the property with the intent of holding for productive investment use.  But if you quit claim right before the sale the question becomes "Did Christian take title with the intent to hold or the intent to sell?  The obvious answer is that you took title specifically to sell.  Which would normally disallow your exchange.

But over the years the question that has been asked is "If Christian and his wife are to owners of the LLC and the LLC owns the property. Then by extension don't they own the property - or at least an equivalent bundle of right the same as owning the property. There have been several favorable rulings on this issue as it relates to trusts to the point that most accountants are now accepting this as trusted practice for LLCs as well.

You never say never with the IRS.  But you're on pretty good footing.

[Ashish Acharya]

In a 1031 Exchange, the same entity must hold title to both the sold and purchased properties. Since your Boston condo is in an LLC, transferring the title to your personal name to satisfy the lender could potentially trigger tax issues or disqualify the exchange.

A common approach is to take the title personally for the mortgage and then transfer it back to the LLC post-closing.

Or look into drop-and-swap strategies.