Can 1031 be used when selling 1/3 share of LLC that owns property

4 Replies

Hello All, 

I am just starting to explore the idea of 1031s down the road. Mostly trying to make sure I set things up right entity wise on the front end to make it work later. 

I along with 2 partners won properties in an LLC where we each own 33.33%. We own multiple rental properties in this LLC.

When the time comes and we want to sell some properties or one partner wants to sell their share of the LLC to the others would we be able to use a 1031?

The first scenario I could see would be to sell property A & trade up to something more expensive. Would an investment in a syndication or LLP that owns real property work for this?

If only on partner wants out, would they be able to just sell their share of the original LLC to the other partners (no real property sold) and use those funds to buy property on their own using a 1031?

And the final thought is can you ever sell properties you own in an LLC to yourself personally? I am thinking both to 'reset' the depreciation clock, and to have 100% ownership in a property instead of 1/3 ownership in 3 properties with partners?

Hope that all makes sense.

Thanks, Dan Dietz

@Daniel Dietz , you can't 1031 an LLC interest.

There are ways to accomplish what I think you want to do here but it's not by 1031ing an LLC interest into real property. I do not have first-hand experience with this, but I have heard of some LLC's liquidating a member's interest so he no longer holds a partnership interest but a TIC interest in the property (along with the LLC) and then he 1031s that TIC into another property. Or the LLC executes the 1031 and just distributes an interest in the replacement property to the guy who wants out and then he 1031s that interest (in the property, not the partnership) into his own real estate, a TIC interest, etc.

I think there may be some better strategies too that may pass the IRS sniff test a bit better.

Hopefully one of the 1031 guys can chime in.

@Daniel Dietz , Think of the 1031 as a sale of investment real estate by a tax paying entity and the purchase of replacement real estate by a tax paying entity. In your case the LLC is the tax paying entity right now. So if you wanted to sell a property owned by the LLC it has to do the exchange. That means that all members of the LLC are along for the ride. So yes any tax paying entity can perform a 1031 exchange on real estate it owns.

Now there are options if one or more partners want out. 

1. You can certainly buy out a members interest in the LLC. Whatever profit there is in it for them will be taxable. Then the LLC with new membership sells and 1031s.

2. You can have the LLC sell and 1031 into one or multiple properties. Once the 1031 is complete you can, with the help of your accountant, dissolve the LLC and distribute the assets (the properties and/or cash) to the former members. This generally does not create a taxable event.

One thing you do not want to do is to dissolve the LLC and distribute the properties before the sale and 1031unless your window is 1-2 years before selling.

@Logan Allec can speak to your last question much better than I but in general simply dissolving an LLC or transferring a property from an LLC to you does not rest a depreciation clock. the only way to do that is with an increase of basis and the only way to do that is to buy the basis up which then creates a taxable event for the seller.

@Logan Allec & @Dave Foster thanks for the input! That gives me a good feel for how it all works. 

As a summary, what I am hearing you guys say is that; 

1) typically when a property is transferred from an LLC in your personal name, that is not *typically* a "taxable event" and it also would not 'reset' depreciation since it still has the same "physical owner". 2) IF you are going to do this *before* a 1031, ideally it should be two or more years ahead of time.

So if I am understanding right, if the 3 of us in the LLC were to sell say 600K of property and invest in a new property(s) for 900K, AFTER the 1031 2 of us could buy out the 3rd partner, which would be a 'taxable event' for that third partner?

Thanks, Dan Dietz

@Daniel Dietz , You could buy out the partner at any time really. The LLC remains intact. It's when you dissolve an LLC prior to a 1031 because you are transferring ownership which opens up the "intent" can of worms.

I suppose if you were using a refi to buy out the partner ahead of a 1031 that might call into question.  But your accountant also might be comfortable with the 1:1 relationship to refi cash exchanged for membership interest.

In general you got it!

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