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.
