10-31 as LLC - “Swap and Drop”

[Collin Wilson]

I am hoping to get some guidance on a 10-31 exchange. My ex-wife and I own our previous primary residence (don't meet the standard for the exclusion). We turned it into a rental in 2019 and transferred it into a LLC. We are now looking to sell the property. The property has appreciated well and we are looking at a decent amount in capital gains. It's my understanding that we can utilize a 10-31 as a LLC and after we acquire the new property we can drop her from the LLC and I could pay her out her portion of the investment. I recognize people will likely frown at the situation, but I'm looking for whether this is feasible and any folks who have utilized this approach. As always, guidance is greatly appreciated.

[Basit Siddiqi]

One thing to consider is you want to be able to get the basis for what your spouse is paid. I assume she will want to be paid Fair market value and not just what the basis is in the property.

This will impact how the depreciation is calculated going forward on her share that you acquire.