1031 Exchange from a multi-partner LLC into a single owner property?

[Jon Klaus]

Selling property in an LLC that I own with another investor. I'd like to 1031 exchange my portion into another property that I'd buy myself. Kosher?

[Dave Foster]

@Doug Pereyda,

There's a couple issues to consider.  First of all it is the use of the property that determines it's eligibility for 1031 treatment not it's type.  Any kind of real estate that it is your intent to hold for productive use can be exchanged for any other kind of real estate that it is your intent to hold for productive use in business trade or for investment.  So a SF home to apartment complex is perfectly fine.  

However, this leads into the second issue - Can you go from full ownership to fractional ownership.  The answer is yes as long as a couple of things are in place.  First the tax payer for the old property must be the same as the tax payer for the new property.  Tax payer refers specifically to what entity files the tax return that includes the property.  If you own the property as an individual then you report that property on your tax return.  You are the tax payer for that property.  If you can take title to a % of the apt. complex as a tenant in common then you would also be the tax payer for that piece of property and that would work.  But if that apartment complex is owned by a partnership of some sort and they want you to buy into the partnership that would not work.  You are not buying real estate, you are buying a security or a membership interest.  That would not qualify.

The exception to this are specifically structured fractional ownership products called DST (Delaware Statutory Trusts) or TICs (Tenants in Common) projects. These are syndicated and specifically sold to investors to give them the benefits of 1031 and the passive fractional activity of something like a REIT which does not qualify for 1031 treatment.