LLC vs Tenancy in Common

5 Replies

My business partner and I are under contract for a multifamily property. He is putting his half of the downpayment from funds from a 1031 exchange. He was told by the 1031 agent that we cannot form an LLC for the first year and must instead proceed in a Tenants in Common agreement for the first year and then may transfer into an LLC. Has anyone else heard this? Neither our lawyer nor accountant has heard similar, and I wasn't able to find this information on the forums. TIA

@Tyler Brown the 1031 agent is correct. Experienced a similar thing a few years ago. If it is 1031 exchange funds they can't co-mingle with other monies, which would be the reason for the TIC. A syndication attorney can confirm this. (this is just my opinion and experience)

@Tyler Brown

I will second what has already been said. I have personally done this when I had an exchange and my partner did not. We have a TIC with the LLC I came out of and his LLC.

@Tyler Brown , There's no statutory one year holding period before you can contribute into a new LLC. That may be one source of the confusion. However, Your partner needs to take title to actual replacement real estate as the same tax payer that sold the old property. That part is true. So if he personally was the tax payer for the old property then he has to initially be the tax payer for the new property.

This type of thing can absolutely be done as a TIC arrangement with him purchasing X% and you or your LLC taking title to the other TIC %. Once that transaction is complete there is no reason why he cannot contribute his TIC interest to your LLC in exchange for membership interest. Or that both of you could contribute your interests into a new LLC. Note that does change the taxpayer to become the multi member LLC. So when you sell it will be the LLC that is selling as the taxpayer. and the LLC will have to do the 1031. The two of you will be tied together at that point.

There's lots of guidance that an entity change right before a 1031 is a no no.  There''s no real guidance for how long after a 1031 is fine.  So maybe the QI is just being conservative, or doesn't understand see the difference in changing entity prior 1031ing or changing entity through a non-taxable event after.