1031 TIC into property already owned

3 Replies

Hey BP crowd, I've always been a reader but this is my first post.  I'm always in awe of the cumulative experience and intelligence found on this site, so thanks in advance for thoughts and input!

Quick background: I'm a member of 10 LLCs, each of which holds a single asset, and I'm the sole member of the LLC which manages these properties. Each holding LLC has between two and three members, and so I'm between 25% and 50% owner of these except for one that is 99% me.

I'm trying to re-lever. I'm 34, in this for another 10-15 years, and while I'm slightly concerned about current valuations, I've got a "good" problem with my LTV. It's down around 35% based on conservative valuations and I want to get up to around 75%, which means doubling assets under control (mostly going more into passive NNN and MFH options versus active management of SFR).

Since I'm not a strong buyer with leverage in this market (I'm seeing all-cash $100k over-ask no contingencies bidding wars right and left), I'm looking instead to buy partners out of existing ownership of these LLCs. They would 1031 into a DST or something bland and safe until their tax situation is better, divorce is over, etc. I'm still in business with them on other properties, known for 10+ years, good friends, etc. I need to carefully consider their situation in my thought process.

QUESTION: I am selling a property (call it Property A) and need a 1031 outlet. If I am a member of another LLC which owns a single asset (call it Property B), and there are two other members, can we split the Property B LLC into a TIC and can I then 1031 into their ownership with the proceeds from the sale of Property A? I'm concerned about how many hiccups there can be from the complexity here as well as the raw numbers, leverage, boot, etc. But I don't want to do further brain damage going down this path if there is some absolute constraint I'd be breaking within the 1031 rules.

I think, if this worked out, I'd essentially be a TIC with myself in a single asset...I'm not averse to this creativity and legwork, and there is a lot of money at stake so it's worth the effort. I just don't want to raise enough red flags to get an audit and have my life upside down, as I have enough work to do already.

Thanks everyone, and I hope this makes sense!!

@Nick Frey , Interesting puzzle.  And what you're wanting to do can absolutely be done. The actual mechanics might need some tweaking and consideration.  Here's some starter thoughts:

1. It sounds like each of those LLCs (ignore your management LLC. It doesn't own anything and is just a vendor for all of the other LLCs I think) is a regarded entity (more than one member and taxed as a partnership so filing it's own tax return). If that's the case and if you don't own more than 50% of any of them then you can 1031 the sale of any of them and buy the property from any of the others as a 1031 exchange. They are not related parties. However then you have an LLC that is still going to recognize gain when it sells property to the first LLC.

2. You could do a drop and swap where you dissolve the LLC, distribute the property to the members as tic and then you 1031 a property of your own to buy the tic interests of the other former members. Yes, that would leave you as the sole owner of the property. And the former members would either do their own 1031s or pay tax on their gain from the sale.

This was not the preferred way of the IRS for a long time. They preferred that the LLC sold the property, did the 1031, and after that was over dissolved the LLC and distributed the property as tic to the former members. However in recent years there have been some rulings that indicate that the former way is being looked at more favorably by the IRS. So get your CPAs blessing and that would work fine.

3. Another option would be to have the LLC do a cash out refi and then use the refi cash to buy out the membership interests of the other members. The LLC would not have a taxable event. The other members would. And you would be left as the sole member of the LLC.

4. The key in all of this is that the taxpayer selling the property must be the taxpayer buying the new property. And that is what will make it difficult to get the other members out of the way without dissolving the LLC first.

@Dave Foster, thanks so much for this info!  Extremely helpful.

#2 is definitely the best option for what I'm looking to do.  I've broached the subject with some investors about option #3, and they want to stay invested in the original asset and join me in putting the refi into another investment (likely more passive).

I'm curious if you or anyone else on BP has had experience with Opportunity Zone funds.  I've found a promising one in Colorado (haven't yet drilled into the PPM but initial hour on the phone with a key operator was extremely positive) and it sounds like an incredible backstop if a 1031 hits the rocks and fails for any number of reasons.  I was told you can role the cap gains from a sale into an OZ up to six months after the standard filing date for the entity (i.e. sale in 2021 means filing date of partnership return by Mar 15 of 2022, OZ investment by early September 2022) and you don't pay taxes.

Maybe this is covered in other posts, I just haven't looked.  But there are basically two thoughts going on here: the mechanics of buying out existing investors (which I think Dave has really handled succinctly) and then comparing that with the pros and cons of an OZ fund.