1031 Exchange into a building to be held with partners?

Question

I have two partners who both have their properties on the market. One of them, Partner A, needs to do a 1031 exchange into the new property (which we haven't identified yet). What's the best way to qualify for a loan on the new property? How should we structure the entity to hold the new property? We need asset protection, but also like-kind treatment for Partner A and flexibility in our exit strategies.

I'm already pre-qualified for a loan, to partner with these other partners I'd be able to afford a larger building than on my own.

Should Partner A put her property into a Land Trust now before the sale so that she can purchase her share of the building in the same entity as the one that sold?

What are your thoughts on this?

Bill Exeter · Answer

The partner that needs to complete a 1031 Exchange must acquire a direct interest in the real estate to be acquired, which often takes the form of a tenancy-in-common interest, in for his/her 1031 Exchange to qualify.  The percentage that he/she owns in the new property must be equal to or greater in value than the property he/she sold.

If either or both of you are concerned about liability, you can each set-up your own single member LLC to hold your individual tenants-in-common interest, which will be treated as disregarded entities (ignored) for tax purposes and will still qualify for his/her 1031 Exchange.

Multiple member LLCs (treated as partnerships), partnerships, corporations, etc., will not work because he/she will be treated as buying a partnership interest or shares in a corporation, which do not qualify for 1031 Exchange treatment.

Liz Knight · Answer

Thank you both!

Dave Foster · Answer

Hi Liz,

A lot is really going to depend on the attitude of your lender but it may be quite a bit simpler than having to go the land trust route.   Partner A needs to purchase her replacement property as the same taxpaying entity for the relinquished property and while a land trust could be used, she may be just as well served to 1031 into a Tenant In Common interest in the new property.

All three of your could go into ownership as to your respective tenant in common interests and have a separate operating agreement for the asset.  After the fact you can take a look at the best way to consolidate the interests if you choose.

The lender is probably anticipating an equal shared loan liability among all parties to the loan but that would not stand in the way of the TIC deeding.  And if you have a lender willing to go non-recourse that would simply be a bonus.  In general lenders like less paper boundaries between them and the asset.