All Forum Posts by: Nicholas Dutson

Great question — exchanges out of LLC/LP syndications trip up a lot of otherwise solid plans. A few keystones to frame your decision:

1) Identify the taxpayer.
In a typical syndication, the LLC/LP (taxed as a partnership) is the seller, so that same entity must acquire the replacement property to keep 1031 eligibility. Individual partners generally can't 1031 their partnership interests—only real property qualifies. “Same taxpayer” in = “same taxpayer” out.

2) Want individuals to go their own way? Plan a pre-sale “drop-and-swap.”
Before the sale, convert partnership interests into deeded TIC interests (or into SMLLCs that are disregarded) so each owner can run their own exchange. Execution and timing are critical to avoid the arrangement being treated as a partnership or a step transaction. Get lender consent and align operating docs first.

3) Consider DSTs as a passive, finance-friendly alternative.
Delaware Statutory Trusts qualify as real property for 1031 purposes and can simplify debt matching, timing, and closing logistics—especially when multiple investors have different goals or when TIC lending is cumbersome.

4) Timing & sequencing: drop-and-swap vs. swap-and-drop.
There’s no bright-line holding period for a “drop,” but many practitioners build in seasoning to show investment intent. Too close to closing can invite step-transaction scrutiny. A “swap-and-drop” (entity completes the exchange, then distributes later) has different risks—facts and documents drive the choice.

5) Tight timelines? Look at reverse or improvement exchanges.
If you need to buy first or make improvements, a properly structured reverse exchange (using an accommodation titleholder) or improvement exchange can keep you inside 1031 while solving sequencing issues. You still live within 45/180-day clocks.

6) Watch the debt/boot math.
To stay fully tax-deferred, replace or exceed both net equity and net debt (or add cash). Be careful with pre- or post-exchange cash-outs, related-party loans, or refinancing timed too close to the exchange.

7) Practical deal points.

• Lender & consents: TIC conversions almost always require lender approval; fractional ownership can trigger tighter reserves and covenants.

• Governance: Use TIC and property management agreements that avoid centralized, partnership-like control and keep voting rights balanced with true co-tenancy.

• Securities overlay: Syndicating TIC or DST interests can implicate securities rules—coordinate with counsel early.

• UPREIT vs. 1031: Rolling into an UPREIT via §721 units is a different deferral path with its own pros/cons.

Common pathways that work:

• All-in exchange: The LP/LLC sells and that same entity acquires the replacement; cleanest when everyone's aligned.

• Pre-sale TIC carve-out: Those who want autonomy receive deeded TIC/SMLLC interests well before closing, then 1031 independently; the rest exchange inside the entity.

• DST replacement: The entity or the separated TIC owners exchange into one or more DSTs for diversification and smoother financing.

If you share a few specifics—entity type, state, lender requirements, member goals, leverage, and target closing date—we can map a timeline (including any seasoning), model the boot/debt requirements, and choose between same-entity exchange, pre-sale TIC carve-out, or DSTs with confidence.

Here’s how I’d underwrite and structure this, speaking as a landlord/investor who’s been through plenty of “tenants-not-paying” acquisitions.

Quick take: Either (A) make the seller deliver the property vacant at closing, or (B) get a steep enough discount + protective terms to be over-compensated for the time, cost, and risk of removing non-paying occupants. BP vets give the same guidance over and over: don’t make the seller’s headache your headache unless you’re paid very well for it.

Price the headache. On small 1–4 unit deals with inherited non-payers, investors commonly require a deep discount or they walk. You’re taking litigation risk + downtime + re-tenanting + capex unknowns.

Vacant-at-close clause (best case). Make closing contingent on actual vacancy and broom-clean condition, not just “seller will try.” If they can’t deliver, your earnest money is refundable and you walk. This is the cleanest version of “buy the asset, not the problem.”

If you accept the risk, add guardrails:

Escrow holdback at closing large enough to cover X months of payments + legal + turn. Example: hold back 6–12 months of your P&I + $5–10k/unit for legal/turn. Release tied to delivery of vacant, undamaged units (or after specific milestones like writ executed).

Seller-paid legal: seller funds your attorney retainer from proceeds.

Per-diem penalties for every day past a hard date that units remain occupied.

Cash-for-keys budget pre-approved with the seller. Often the fastest/cheapest path—just document it well (mutual release, surrender of keys/possession, condition photos).

Assignment of claims: If there’s significant arrearage, get an assignment (often low recovery odds, but it’s leverage).

No-offset clause on the seller note—missed rents aren’t an excuse to miss your payment, so you need the holdback above.

Extension option on your 2-year seller-finance balloon if occupants aren’t out by Month 18 (e.g., one 6–12 month extension for a pre-set fee). That de-risks timeline slippage.