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?

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

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.

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