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

1031 Exchanges
12yFollow

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

Jon Klaus
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes

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?

0Reply
60 views

Most Popular Reply

Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
10y

@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.

The 1031 Investor5137 Reviews
WebsiteView Page
3Reply
See this reply in the discussion

20 Replies

Jump to latestLatest
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    12y

    Hi Jon,

    Unfortunately, no.  You do not own real estate as an individual, you own a partnership interest in the partnership, which is not real estate.  The partnership is actually the owner (taxpayer) of the real estate and the seller of the real estate.  You and your partner would merely be receiving a cash distribution from the partnership upon sale.  There are ways to work around the issue, but it is difficult to discuss in posts since a lot of follow-up questions are needed to determine what your options might be.  I will shoot you an IM with my phone number if you would like to discuss further.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    2Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Jon Klaus  Thanks for posting the thread.  I learn so much from this site, and thanks @Bill Exeter for answering.

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    12y

    Hi Jerry,

    You are most welcome.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    1Reply
  • Jon Klaus
    OP
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    12y

    What if both partners (the LLC) exchanged into the new property?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Hi Jon,

    I am no expert and would like to hear the answer as well. I think as long as the entity stays intact then you can 1031 into another property but I am not sure.

    I know if for example you start a partnership to buy a larger property you would set up yourself as a tenant in common so you could 1031 the your entity later when selling your part.

    There are a bunch of rules and regs ( all in the details) so will be following this thread...... : )

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Jason James
    Investor · Louisville, KY · Member since 2014 · 202 posts · 111 votes
    12y

    @Jon Klaus Good question as I am in the same boat. I stand to have a large gain from the sell of our (meaning LLC) commercial property and I to want to 1031 exchange my portion. I have done a bit of research online but no real clear answers from anyone that has actually done it. It would be great to hear what others have to say. Although its tough to explain through a post I agree, it would be great to keep the information flowing. Any help would be much appreciated.

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    12y
    Originally posted by @Jon Klaus:

    What if both partners (the LLC) exchanged into the new property?

    Hi Jon,

    If the LLC is going to stay intact (together), then you are O.K. The LLC, which is generally treated as a partnership for tax purposes when there are multiple members, would be the "taxpayer" in this case. So, as long as the LLC stays together, sells the relinquished property, set-ups the 1031 Exchange as the taxpayer, and acquires the replacement property all under the LLC, you are in good shape.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    3Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    12y
    Originally posted by @Jason James:

    @Jon Klaus Good question as I am in the same boat. I stand to have a large gain from the sell of our (meaning LLC) commercial property and I to want to 1031 exchange my portion. I have done a bit of research online but no real clear answers from anyone that has actually done it. It would be great to hear what others have to say. Although its tough to explain through a post I agree, it would be great to keep the information flowing. Any help would be much appreciated.

    Hi James,

    Is your limited liability company (LLC) going to stay together? Do the partners want to remain intact in the LLC and acquire the replacement property together as the LLC (partnership)? If so, then you are in good shape. Your LLC is the taxpayer (seller) and will structure the 1031 Exchange, and will acquire the replacement property.

    If no, and your partners want to break up the LLC upon sale of the property and go their separate ways, then it gets significantly more complicated. There are many, many possible solutions, but the path chosen will depend on the goals and objectives of each individual partner, on whether the individual partners are willing to cooperate with each other, on how many of the partners want to cash out and pay their taxes and how many want to 1031 Exchange, etc. Going through the wide selection of follow-up questions is very difficult in a thread like this. It is much easier by phone. There are just too many follow-up questions that need to be asked, and too many possible solutions that then trigger more follow-up questions.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    1Reply
  • Anne Wallace
    Investor · Nashville, TN · Member since 2014 · 104 posts · 15 votes
    12y

    I am curious as to the holding period  on a 1031 exhcange .1year from the purchase of the replacement property or is it based on the acquisition date of the relinquished property?or what ?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    To qualify the IRS has certain rules and procedures.

    The holding period for property after purchasing is often a debated topic for which the IRS doesn't give a hard and fast rule.

    What most 1031 companies, attorneys, and accountants look at that are part of your team is based on case law will the 1031 timeline and protocols stand up to a future audit if the IRS was trying to disallow a transaction??

    Most look at 1 year as a safer guideline but nothing is set in stone. The IRS looks at things differently for resale versus investment property.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Anne Wallace
    Investor · Nashville, TN · Member since 2014 · 104 posts · 15 votes
    12y

    Thank you very much. 1 year plus I day seems like a safe strategy. 

    0Reply
  • Doug Pereyda
    Rental Property Investor · Los Gatos, CA · Member since 2016 · 7 posts · 0 votes
    10y

    Hi Bill - can create a 1031 exchange from a single family home sale in California and transfer that into partial interest in an apartment complex (out of state )?  What options do I have?

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @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.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    3Reply
  • Doug Pereyda
    Rental Property Investor · Los Gatos, CA · Member since 2016 · 7 posts · 0 votes
    10y

    Great info Dave.  Thanks.

    0Reply
  • Doug Pereyda
    Rental Property Investor · Los Gatos, CA · Member since 2016 · 7 posts · 0 votes
    10y

    Dave, did a bit more reading, and it actually looks very favorable against the TIC option, and even better asset protection than the typical LLC setup. Other than the logistics and timing to setup, how do lenders (banks) see these instruments if seeking financing? I'm used to the typical apartment complex LLC setup.

    0Reply
  • Doug Pereyda
    Rental Property Investor · Los Gatos, CA · Member since 2016 · 7 posts · 0 votes
    10y

    I'm referring to DSTs in my note above.

    0Reply
  • William Chu
    Investor · Stockton, CA · Member since 2015 · 19 posts · 8 votes
    7y

    Hi guys. How about partnerships is not in LLC? The relinquished properties (3) is my sister and I owned. We decided to get rid of all 3 properties. She wants to pay capital gains tax. But I like to reinvest with 1031 exchange. In this case can I do my own potion and my sister does her own? Thanks for any comments.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @William Chu, It can be done.  How quickly depends on what you actually mean by "partnership".  If it is a registered partnership that has a taxpayer ID number and files a tax return then the partnership is the taxpayer for the property.  It must do the exchange and sell and then buy the new property.  What you and your sister could do in this event is to do a partial 1031 exchange and buy one property that would satisfy you with half the proceeds.  At the end of the exchange the partnership owns a property and has a bunch of cash .  You dissolve the partnership and you take the property and your sister gets the cash (net of taxes of course).  That's a process but would work.

    However, if by "partnership" you mean that you and your sister just bought a property together and you're both on the deed then you are tenants in common.  And each of you actually own a piece of investment real estate that just happens to be 50% of a larger piece.  So when you sell you can do an exchange on your 50%.  and she can simply take the cash for her 50% and pay the tax.  

    The second way is easy peasy and demonstrates the flexibility of owing property as a tenant in common with partners.  the first scenario can work as well.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
  • William Chu
    Investor · Stockton, CA · Member since 2015 · 19 posts · 8 votes
    7y

    @Dave Foster

    Thanks Dave. We don’t have tax I D. Just as tenants in common. So in this case in escrow withholding 50% capital gain tax for my sister, my 50% tax defer to 1031 exchange identified property in 45 days from close of escrow.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @William Chu, Yep that will work just fine.  But don't forget that you must use a qualified intermediary to process the 1031 portion of the transaction.  And they must be in place prior the closing of the sale.  Looks like a good scenario!  I just sent you a pm if you have more questions.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free