LLC 1031 exchange after divorce

[Randy Wieland]

My wife and I have an LLC. We divorced last year. We are in a community property state. The rental proceeds have been claimed as regular income on our 1040's. We want to sell one of the two remaining properties in the LLC and each do a 1031 exchange. We have owned the property for 39 years. It has been in the LLC for 10 years. The exchange company says we cannot do that unless the sale property is titled in each of our names, not the LLC. HELP!

[Dave Foster]

@Randy Wieland, Husband/wife LLCs in community property states can be considered to be single member LLCs or a disregarded entity for tax purposes.  The 1031 company you talked to may have missed this.  

If your LLC does not file it's own tax return then all activity of the property was reported on your personal joint tax return. To do a 1031 exchange the tax payer must be the same from the old to the new property. If your LLC is a disregarded entity then you can sell as the LLC and buy in your individual names. The divorce decree will speak to the disposition of the property and the IRS will honor that. To sum up, if the LLC is a disregarded entity then you can sell as the LLC and buy in your names using the 1031 exchange. That's one option the 1031 QI missed.

The other option the 1031 QI you talked to missed was the option to "drop and swap". Immediately before sale you dissolved the LLC and distribute the property to each of the former members as tenants in common. Again, the divorce decree will support this. And the IRS will honor it. Immediatley after the quitclaim you and your ex will sell the property. And each of you can go your separate ways - one can 1031 and one can take cash. Or both can do their own 1031s.

If the LLC is not a disregarded entity then you do have an issue in that the LLC must sell and buy. But again, the option of a drop and swap should have been discussed with you.