1031 Exchange into New Purchase

[Simon Gill]

My business partner and I are planning to buy a commercial building in Nevada. He is currently selling his commercial building in Washington and 1031 exchange into the Nevada deal. In order for the 1031 to take place, is he required to carry over his existing LLC or can we create a new LLC for Nevada and he move his funds without moving his existing LLC?

[Bill Exeter]

Hi @Simon Gill, 

I depends.  The important requirement is that the "taxpayer" doing the 1031 Exchange be the same on both sides of the transaction.  

As long as the LLC is a single member LLC and a disregarded entity, it would be treated as if he was the real owner of the underlying real property.  The 1031 Exchange would be set-up under his name (who will relinquish legal title from the single member LLC).  He could acquire the replacement property under his individual name, under the same single member LLC, or under another LLC as long as the new LLC was also considered to be a single member LLC and a disregarded entity.  

The answer would change if any of the LLCs discussed above were not disregarded entities.  

[Simon Gill]

thanks Bills for your response. My business partner is currently a single member LLC and a disregarded entity however, he plans to sale and 1031 exchange into the Nevada deal where he mentioned I join his existing LLC as partners (50/50). I'm favor of creating a new LLC partnership. Will his 1031 exchange be difficult if I join his LLC or create a new LLC ?

[Bill Exeter]

Hi @Simon Gill, 

This will not work. Adding you to the LLC now changes the "taxpayer" from an individual to a multi-member LLC, which is generally treated as a partnership for tax purposes. He would be treated as if he bought a partnership interest instead of acquiring real estate.

There are some court cases that did allow this, so your legal advisor can review the case law and see how close you can come to those.  However, the cases that are generally applicable were ruled upon under the old California Partnership Act and a court today may or may not rule the same.  We generally recommend not doing it if you can avoid it.  

The two of you could acquire the property as tenants-in-common, which work for his 1031 Exchange and allow you to buy into the property as well.  

[Dave Foster]

@Simon Gill, You can get where you want to go a couple of ways and still keep the integrity of your partner's 1031. The key is that he or his disregarded LLC will have to take title to the appropriate amount of replacement real estate initially. If a 50% TIC will satisfy his reinvestment requirements then his LLC and your LLC or he and. your LLC can take title as TIC 50/50.

Once there it's a question of which your accounting team prefers.  Either

1. Keep the TIC structure and form a third entity for management and operations that is owned by both TIC members. This can give you an extra degree of liability separation and keep the greatest amount of flexibility if a sale is ever anticipated in the future. Because TIC ownership of the asset allows the two of you to separate or go together 1031wise in the next sale.

OR

2. Once the 1031 is complete your partner can contribute his TIC interest to your LLC in exchange for membership interest in the LLC. That accomplishes your desire to put everything into one LLC ownership. And in general contributions into and distributions out os an entity are not taxable events. So it can be accomplished without a tax hit for anyone. The down side would be that the multi member LLC is now the tax payer for the property. So in the event of a sale it will then need to be the LLC that does the 1031. The individual members will have to move forward together without some other machinations.