Will this void the 1031 exchange??

[Lee Schram]

On a 1031 exchange when an LLC owns the property and one member of the group wants a return of profit and capital, will that void the 1031 exchange tax rules if the member is paid at closing and the proceeds do not go back to the LLC account?

Thanks!

[Dave Foster]

@Lee Schram

It is the LLC that must do the exchange and both sell the old property and buy the new property. In essence what the LLC would doing is a partial exchange. It can be done But here's the first problem: The money that goes to the individual is boot and does create a taxable event. the second problem is that you'll then have the problem of an LLC that has done a 1031 exchange, incurred a recognition of gain event and you have to figure out what to do with the member who got the cash, caused the recognition but is still a member of the LLC so has a membership interest in the property by virtue of his membership interest in the LLC.

If the LLC were to do a complete exchange and then buy out the membership interests of the one party that could be done with your cpa's blessing.

Or another option that our clients have pursued many times in the past has been for the LLC to complete a partial exchange and then after the fact dissolve the LLC and distribute the property to the members who want to go forward and the cash and associated tax liability to the individual wanting to cash out.