Skip to content
Multi-Family and Apartment Investing

User Stats

14
Posts
4
Votes
Tyler Brown
4
Votes |
14
Posts

LLC vs Tenancy in Common

Tyler Brown
Posted Sep 27 2019, 15:54

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

User Stats

276
Posts
99
Votes
Jonathan Orr
  • Developer
  • Boise ID
99
Votes |
276
Posts
Jonathan Orr
  • Developer
  • Boise ID
Replied Sep 27 2019, 16:16

@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)

User Stats

14
Posts
4
Votes
Tyler Brown
4
Votes |
14
Posts
Tyler Brown
Replied Sep 27 2019, 16:21

Greatly appreciate the response, Jonathan. Thanks.

BiggerPockets logo
BiggerPockets
|
Sponsored
Find an investor-friendly agent in your market TODAY Get matched with our network of trusted, local, investor friendly agents in under 2 minutes

User Stats

2,064
Posts
2,332
Votes
Lee Ripma
Pro Member
  • Rental Property Investor
  • Prairie Village, KS
2,332
Votes |
2,064
Posts
Lee Ripma
Pro Member
  • Rental Property Investor
  • Prairie Village, KS
Replied Sep 27 2019, 22:38

@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.

User Stats

8,545
Posts
8,848
Votes
Dave Foster
Pro Member
#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
8,848
Votes |
8,545
Posts
Dave Foster
Pro Member
#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
Replied Sep 28 2019, 08:40

@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.

User Stats

14
Posts
4
Votes
Tyler Brown
4
Votes |
14
Posts
Tyler Brown
Replied Sep 28 2019, 14:27

Dave, that makes sense. I guess there's no reason for me to forego an LLC personally and can enter into the partnership that way. Thanks for the insight!