1031 from LLC distribution to individuals?

Question

My brother and I have an LLC that owns a share of a property that we inherited.

Our property share is about to be purchased, and I would like to rollover my half of the proceeds into 1031/DST properties. My brother might want to do the same, and to take cash out.

We just realized that since we are receiving the proceeds to the LLC, the 1031 exchange most likely has to be done by the LLC.

If this is the case, is there any way for each of us to have our own 1031 investments from here, or must we share how we invest from hereon out, with the proceeds of our sale? thanks

Mark Creason · Answer

Dave,

The individual behind the LLC would be the accredited investor if he/she qualifies.  I have a sample accredited investor worksheet if anyone is interested.  Lists the qualifications my group looks for.

Mark

Natalie Kolodij · Answer

@Dave Foster can help better than I

I believe it will also need to be purchased by the LLC. Also, if your brother takes out cash it will be boot and be taxable.

Dave Foster · Answer

@Mike Mosk, There is usually no requirement that distributions match membership interests. You could use the retained boot along with the equity to balance the equation.  It's really going to be what  you all agree on.  Of course your accountant will counsel you on the amount of cash to reserve  in the dissolution for the final tax liability.

your question about DST intrigues me.  I think the answer is going to vary on the individual syndication documents on transferability.  This is similar to the issue of an accredited investor passing away and the heirs are non-accredited.  Let's see what some of the DST pros say.

Jessica Zolotorofe · Answer

you can't unfortunately :( @Natalie Kolodij is right. The LLC has to reinvest. The only way to really do separate 1031s is if a property is owned as tenants in common, but not if title is in the actual LLC.

Mike Mosk · Answer

thanks folks - this has been extremely helpful!

@Mark Creason i would definitely be interested in the Investor qualification worksheet if you can send that to me separately.

Dave Foster · Answer

I knew @Mark Creason would be right there with the answer!!

Mike Mosk · Answer

@Dave Foster thanks so much for your response!

this makes sense.

now - if we were to dissolve the partnership, and IF one of us took out more in a boot distribution than the other, would it make it more difficult to distribute the properties, given that our 1031 investment percentages (say 60:40) didn't match our LLC partnership percentages (50:50)?

also - is there any issue with an LLC purchasing a 1031/DST - how does an LLC get recognized as an Accredited Investor??

Dave Foster · Answer

@Mike Mosk, You could do that with an accountants blessing and keep the LLC going. Or you could Sell as the LLC, do a 1031 and buy as the LLC two separate properties or 1031 qualified products.  After the fact dissolve the LLC and distribute the properties to whichever member wanted that particular property. You distribution will go along membership interest lines

Mike Mosk · Answer

thanks @Jessica Zolotorofe!

i will check with our accountant tomorrow, but it sounds like the only way to do so would be to rollover from the LLC into 1031 vehicles, as opposed to doing so individually - from there, i wonder if we could each decide what 1031/DST to invest in (if we wanted to do different ones), and then have the accountant distribute the proceeds each month/quarter to us individually, based on what was received, from each 1031 investment?

Mike Mosk · Answer

Thank you for the reply! :)

yes, the biggest question is if/how we could (or even should) invest into 1031/DSTs separately as members of an LLC receiving proceeds from the sale of our sole property.

1031 from LLC distribution to individuals?

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