How would you structure a partnership and then 1031?

Question

Suppose my partner and I buy a 20-unit multifamily, hold it for several years, and then decide to sell and go our separate ways. How would I complete a 1031 exchange into my next property on my own? Would tenants-in-common ownership be the right structure, or a master LLC? Has anyone dealt with this before?

Dave Foster · Answer

With your accountant's approval that would be fine.  I imagine they would want each of those LLCs to be SMLLCs taxed as sole proprietors.

Dave Foster · Answer

@John B.  There's no problem doing a 1031 exchange with your proceeds in the future if you sell and go separate ways as TIC. The issue when investors put the property in multi-member LLCs is that the title holder or (taxpayer) for the property is the LLC.  In order to do a 1031 exchange, the title holder has to be the same for the replacement property. This would require you to stay together unless you did a process called a drop and swap.  You take the property out of the LLC right before the sale and distribute it to each of you as tenants in common.  And then immediately sell the property.  This way, you are selling as tenants in common.  And you can separate from the other person with no problem.

If the LLC were a single-member disregarded entity, it would also be fine because disregarded LLCs don't change the taxpayer for the property. This means it could be under the LLC or your personal name, and it wouldn't be an issue. But for partnerships like this, TIC is the best structure for a clean 1031.

John B. · Answer

Thanks Dave, so would the structure look like ...John Holdings LLC, a Texas LLC, as to an undivided 50% interestPartner Holdings LLC, a Texas LLC, as to an undivided 50% interest.

This way the property has the protection of an LLC and its split so we can go our separate way for 1031 rather than holding it TIC in our personal names?