Exchanges with Partnerships, LLC’s and other Entities, Part 4

 

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchanges with Partnerships, LLC’s and other Entities, Part 4

Trying to do a 1031 exchange with an LLC or partnership can be a thorny issue. It can be much different than an exchange with individual personal names. Where a retired couple can utilize a rental property to make an exchange, an LLC or partnership must abide by specific rules and regulations that might change that strategy.

Stakeholders in an “entity” can distribute assets in certain ways and after a two-year holding period, sell, go their separate ways while those choosing to exchange succeed in avoiding the capital gains tax. Then there's something called ‘drop and swap’ where different partners buy one another out in different ways. The key here is that most states allow this, but California does not.

From 1994 to 2002, with IRS modifications and the emergence of TIC and DST strategies the 1031 exchange has evolved and the results have given many more the opportunity to economically and efficiently “swap until you drop.”

Question 1:
I am selling my share of ownership from LLC to the other member. What are my options for doing 1031?\nPlease explain.

Answer:
You can't perform an individual exchange with an LLC. The traditional drop and swap transaction is no longer approved by the IRS, more scrutinized in California than other states. To effectively achieve your objective you need to plan ahead. First you distribute the assets of your LLC or Partnership to newly formed individual entities. You hold these new entities all owning a piece of the original property for two years and then you are able to sell with those who want to exchange and those who want to pay taxes all achieving their goals.

Question 2:
We own a commercial property with a partner. We put the building for sale it under contract. We our portion of the proseeds my husband and want to buy another commercial building to move our real estate businesse there. We rent to our self in the building we are selling. Can we do a 1031 exchange?

Answer:
It's important to have the property in personal names or separate entities and not in the name of the LLC or partnership in order to do the 1031 exchange. In terms of renting from yourself, this can be an effective as long as the rent and terms reflect the prevailing market.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

When you're going to do a 1031 exchange deal, there are lots of things to consider – with a securitized property you need a licensed FINRA professional with either a Series 22 or Series 7 license, and your professional needs to understand how to work with the multiple stakeholders involved in the business. You also need to know about the crucial role of a qualified intermediary. Marilee Hill, with 20 years experience in the business, provides this free advice to clients to help them get started rolling the ball up the hill for a 1031 exchange deal.

Exchanges with Partnerships, LLC’s and other Entities, Part 3

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchanges with Partnerships, LLC’s and other Entities, Part 3

Doing a 1031 exchange with a partnership or LLC is a different process than other types of exchange deals. You have entity exchange rules, which apply to these processes, and these rules can change over time.

For instance, there's a process where someone in a partnership or LLC buys out someone else that some people call ‘drop and swap.’

Here, state law is a major wrinkle in how you develop a 1031 exchange with the drop and swap because the state of California doesn't allow this any longer, but other states do.

Basically, there are specific rules for cashing out of a multiple party LLC after a specific time frame which happens to be 2 years. And these rules can be navigated by people who have planned ahead and carefully follow the requirements for an exit from a LLC to a successful 1031 exchange.

Over time, the IRS has provided clear rules and more accessible structures for these types of deals. However, the like kind requirement still applies in that partnerships or LLCs can't take money from properties and put it into funds, REITs or mortgages.

Question 1:
am a REALTOR working with a client who is the beneficiary of a trust. Her mother passed and her mother's principal residence has been placed in the trust. Is it possible for a trust to do a tax free exchange and avoid paying capital gains?

Answer:
Here's an interesting one because as part of the estate, the principal residence already doesn't have any taxes applied — the value of the property is the fair market at date of death. If several years have passed and the value has increased, of course, you can do an exchange. To do an exchange with an accredited investor status, the trust has to have a value of $5 million or more (includes debt).

Question 2:
Can a QPRT be used for a 1031 exchange? Thank you Ann Oliver

Answer:
A QPRT does not have anything to do with a 1031 for this reason – the QPRT relates to estate planning for personal residences, and 1031 exchanges can't be done with personal residences.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

Marilee Hill has 20 years of experience working in the real estate field and knows 1031 exchanges in and out – as a FINRA certified professional, she has helped many clients to deal with 1031 exchanges.

Marilee Hill likes to say that there are two sides of the business, the technical side and the people side – both of them are important in working through 1031 exchanges which are often complicated and have obstacles. Let Marilee Hill help you to pursue a 1031 exchange on solid ground.

Exchanges with Partnerships, LLC’s and other Entities, Part 2

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchanges with Partnerships, LLC’s and other Entities, Part 2

When partnerships, LLCs and other entities get together to do 1031 exchanges, entity exchange rules apply. These rules also tend to change over time. One example is the “drop and swap” – a process where one party in a partnership or LLC buys out another. The greedy state of California no longer permits, yet on the East Coast drop and swaps are a daily occurrence.

For those in a partnership or multiple party LLC the entity can distribute proportionately the assets to individual newly created entities and after a two-year period each upon a sale can go his separate way and avoid large capital gains taxes.

Changes in permitted entities into which one could exchange evolved from 1994 to 2002 when the IRS modified and provided clear guidance for the then common TIC structure. When the 2008 financial debacle revealed the TIC structural problems, the DST (2003 birth) with few exceptions replaced the TIC.

Neither individuals, Partnerships or LLCs or other entities can exchange properties into funds or real estate investment trusts.

Question 1:
If I sell a commercial property can I exchange into a REIT ?

Answer:
Regardless of the kind of real property, you can never exchange into a REIT.

Question 2:
I am a partner in a Apt. complex that we are preparing to sell and when it is sold I will realize about a 250K capital gain. I have been in the partnership for over 25 years. Can I take the gain and invest it in a REIT and use the 1031 tax free exchange?

Answer:
1. To do an exchange, you must exchange the original investment amount, the capital gain amount
and any debt.
2. You as an individual partner cannot exchange from an LLC or Partnership structure.
3. The REIT is not a vehicle into which anyone can do a 1031 exchange

About Marilee: Role of Marilee Hill, Registered Representative (RR)

With unique prior experience Marilee Hill with more than 20 years as a broker in the field of commercial real estate obtained FINRA licenses to specialize in securitized 1031 exchanges. Her first 1031 exchange 1991 was a $12M apartment acquisition before the existence of the TIC.

Marilee presents 1031 exchanges a in a straightforward way and helps clients to understand risk tolerance and financial requirements.

Laying the groundwork for 1031 exchanges means understanding people and how they work and explaining how every step of the process unfolds.

Ask Marilee about help to form a real estate strategy that will keep your plan legal and in the good favor of regulators.