10-31 as LLC - “Swap and Drop”

Rental Property Investor · Leesburg, VA · Member since 2019 · 43 posts · 13 votes

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.

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

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.

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Miranda Bilodeau
Member since 2025 · 20 posts · 15 votes
1y
Drop-and-Swap options are available for 1031 exchanges. As long as you and your ex-wife are the final taxpayers for the relinquished property and then the acquired property, you should be able to complete the 1031 and then your ex-wife can leave the partnership with her share of the proceeds.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
1y
@Collin W., Any entity can do a 1031 exchange. What is important is that the taxpayer for the new property is the same as the taxpayer for the old property. After the 1031 is complete, you can then work with your accountant to "purchase" her membership interest in the LLC. So you own 100%. There are ways to do this without triggering a tax.

If your LLC does not file a tax return, then this isn't needed. The taxpayer is you and your wife's joint return. You can sell as the LLC and buy as yourselves, or as just you, or as the LLC without her as a member. In all cases, the new property will still be reported on the same tax return as the old property - your joint return

You might also do the exact opposite, "Drop and swap", where you would dissolve the LLC immediately before the sale and become TIC (tenants in common). Each of you could then take your interest in the property and do a 1031 exchange using your portion of the proceeds.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
1y
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.
[email protected]917-280-8544
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Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
1y
When transferring ownership to your spouse, you’ll want to make sure she’s paid based on fair market value, not just the property’s current basis. That way, the depreciation on her share will be calculated correctly going forward.
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