1031 into an LLC

[Joshua Smith]

Hi all,

My brother @Aaron Smith is planning on 1031'ing proceeds from his 4 unit into a 4 unit renovation project in Washington DC. 

Two quick questions for all you 1031 experts:

1.) Can he 1031 into an LLC? (meaning can he purchase the property with an LLC, having 1031'd into it). He owned his previous property in his own name.

2.) If so, can the LLC have a partner?

The reason we are asking is so that he can have the best chance to get approved for financing (If a partner is able to join the LLC to bolster the financial strength of the LLC).

Any and all comments are invited.

Thanks

Josh

[Dave Foster]

@Joshua Smith, the tax payer has to be the same for the relinquished property and the replacement property.  Since he is selling as himself he needs to buy as himself but...

1. There are ways he can contribute it into an LLC after closing.

2. The lender may accept a guarantor who is not on title.

3. If the LLC he is desiring is a single member LLC it is probably disregarded and he could sell in his name and buy in the name of that LLC.

4. He could buy as himself or as the disregarded LLC a TIC portion of the new asset (paying attention to the reinvestment requirements) with another individual buying the other % under one loan.

[Drew Reynolds]

@Dave Foster is correct - you must follow the same tax-payer provision. This means you must acquire the replacement property under the same legal entity that was the seller of the relinquished property. If you bought the previous property in your own name, you may need to acquire the replacement property in your own name - however, as Dave described, you may be able to set up a single-member LLC - consult your attorney on this one.

Also as Dave mentioned, the easiest way to bring in a partner is to acquire the new property in a tenants-in-common (TIC) legal structure, which would allow for the 1031 exchange. The partner would not be a part of the proposed LLC, but could be part of the borrowing group, which could accomplish the same goal.

[Bill Exeter]

Originally posted by @Joshua Smith:

Hi all,

My brother @Aaron Smith is planning on 1031'ing proceeds from his 4 unit into a 4 unit renovation project in Washington DC. 

Two quick questions for all you 1031 experts:

1.) Can he 1031 into an LLC? (meaning can he purchase the property with an LLC, having 1031'd into it). He owned his previous property in his own name.

The answer is "it depends."  He sold as an individual, so he must acquire his replacement property as an individual.  However, if he acquires the property through a single member LLC that is also considered to be a disregarded entity with him as the sole member it would qualify because it is treated as if he personally bought the property.  The LLC is disregarded or ignored for tax purposes.

2.) If so, can the LLC have a partner?

No, not if he wants to buy through an LLC.  It would have to be a single member LLC that is treated as a disregarded entity (see comments above).  LLCs that have more than one (1) member are not disregarded entities and are generally taxed as partnerships for tax purposes.  It would be treated as if he sold his relinquished property but a completely unrelated entity bought the replacement property and the 1031 Exchange would not qualify.  He could buy with another party as tenants-in-common so that they are each treated as owning a direct interest in the real estate.  However, some lenders will not lend to a TIC ownership structure. 

The reason we are asking is so that he can have the best chance to get approved for financing (If a partner is able to join the LLC to bolster the financial strength of the LLC).

Any and all comments are invited.

Thanks