Exchanges with Partnerships, LLCs and other Structures

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, LLCs and other Structures

Partnerships, LLCs and other entities can perform 1031 exchanges. The problem is when all of the individuals involved in the business do not want to do an exchange.

There used to be a “drop and swap”.  California, in particular, declared the “drop and swap” not to result in a 1031 exchange.  The would-be exchangers can avoid a “drop and swap” by buying out the non-exchangers – difficult to allocate the past financials.  The non-exchangers will have to pay taxes.  In decade-long partnerships with large capital gains taxes looming, the alternative is to plan ahead and distribute the partnership to each investor’s newly created separate entity in a TIC structure.   After two years, everyone can sell and separately go their own way – do an exchange or pay taxes.  The TIC structure was defined and blessed in Rev. Proc. 2002-22.

When you exchange into a property, you must own the underlying real estate and have responsibilities for its burdens and benefits.  Common structures are TIC, DST, and joint tenants.  Within these structures the exchanger can be a separate LLC, Partnerships of various forms, etc.  You cannot exchange into “funds” of any kind.  Those asking about exchanging into REITs will receive a resounding “no”. 

Question 1:
If the Property is in a Partnership or LLC, does this disqualify the property from qualifying for a 1031 Exchange?

In a Partnership or LLC the 1031 exchange has to be done in the name of the LLC or Partnership; therefore, all partners need to exchange.  Your best  remedy is to plan ahead and distribute the ownership into individual entities, becoming Tenants in Common.  After two years, you can then sell the property and each separately do a 1031 exchange.

Question 2:
I am raising money with a 506C offering in a LLC\ncan the investors do a 1031 exchange?

You cannot do a 1031 exchange into a LLC entity.

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

Marilee Hill has an abundance of experience in real estate. As a property manager and a real estate broker, she learned all sides of the real estate business, including both the physical property management side, and the real estate rules in various jurisdictions.

Now, Marilee Hill also helps clients with 1031 exchanges. Throughout her career, Marilee has always sought to understand the sponsors and their histories; the sponsors respect her knowledge and appreciate her truthfulness.  Hill loves to work with clients to help them achieve what is possible in the real estate world.

1031 Exchange