1031 exchange with an LLC

9 Replies

Sold a property (proceeds with Qual. Interm.) & have a new property to buy. Formed a new 2 member LLC to acquire & hold new property, but accountant says it needs to be Tenants in Common. Can you do a 1031 exchange with an LLC? Thx!

Originally posted by @Krista Ward :

Sold a property & have a new one to buy. Formed a new 2 member LLC to acquire & hold new property, but accountant says it needs to be Tenants in Common. Can you do a 1031 exchange with an LLC? Thx!

If you already sold the property, there is no possibility of the 1031. Thus, other questions are irrelevant. 

The tax ID of the seller must be equal to the tax ID of the buyer. If you sold as a person you have to be on title as a person, or at worst a disregarded entity (like a single member llc). If you sold as a disregarded entity you or that llc or another disregarded llc can be on the title, but not a multiple member llc, at least not as the sole new owner. (After all, you’ve transferred ownership.)

All of this is “to the best of my knowledge”. But seeing as how your CPA agrees with me I feel pretty solid.

Ps. Your QI should have told this when you mentioned how you want to title the new property, that’s kind of their job. If you never told them, that’s your fault, if you did, that’s not good they didn’t catch it. You’re lucky to have had a good enough cpa to catch this before you bought and had your 1031 disregarded and owed all the taxes. Probably time to buy them a nice dinner. 

@Krista Ward ,, verifying what your accountant and @Bill Brandt are saying. The problem is going to be the tax return that reports the new property. A multimember LLC has to file taxes as a partnership. Therefore if you take title as that LLC you are changing the tax payer from you which it is now. that is why your accountant is suggesting that you and the other individual take title to the property as tenants in common. That way you are selling and you are buying real estate.

You'll have to make sure and adjust the TIC percentages to reflect your reinvestment requirements in the 1031. And after the 1031 is complete you can then form a multi member LLC if you want and each of you can contribute your TIC ownership into the new LLC in exchange for membership interest. That should not create a taxable event.

another option that keeps more flexibility for you is to stay Tenants in common and form a mm LLC that has a contract to manage the property - run it, maintain it, collect rents and distribute profits to the members (the same two people.

But keeping the property held in tenants in common you retain the ability to later sell and each of you go your separate ways in 1031s. If it is in the MM LLC then the LLC has to do the exchange and the members have to stay together.

Hi @Krista Ward

The answer is "it depends." How did you hold legal title and report the relinquished property that you just sold? Was it under your individual name, an LLC (single member or multiple member/partnership), etc?

Hi @Krista Ward

It depends. How did you hold legal title and how did you report the relinquished property? Was it in your individual name or other? If it was in your individual name, you can acquire the replacement property through a single member LLC/disregarded entity but not a two person/member LLC. The SMLLC/disregarded entity is ignored for tax purposes and treated as if the underlying member actually bought the property for tax purposes. The multiple member LLC (partnership) would not work because it is a completely different taxpayer than the person/entity that sold the relinquished property.

Your accountant is correct. You can acquire the new replacement property with another investors as undivided interests tenants-in-common (TICs). The percentage of the property that you acquire must be equal to or greater than the Net Sale Price of the relinquished property that you sold. Each TIC could set-up and acquire title under their own SMLLC/disregarded entity if you are worried about liability.