1031 Exchange question - different LLCs/ownerships

[David Walkotten]

Hi CPAs familiar with 1031s, I have a question.

My business partner and I may want to do a 1031 exchange on 2 real estate properties. Here is the scenario:

1. We're Selling a duplex for ~$115k from my partner and my joint LLC.

2. We're Buying a 24-unit for $760k in a new LLC with a 3rd partner. The equity breakdown is 33% per equity partner.

I think this meets all the timing and exchange requirements, except I am looking for your guidance on the following:

1. Does a 1031 exchange need to be within the same LLC?

2. Does the exchange need to happen within the same ownership structure (50/50, like the duplex)?

Ultimately, can we legally fall under a 1031 exchange with this duplex and this 24-unit property that has a different ownership structure?

[Dave Foster]

@David Walkotten, there's a couple of things that you'll have to watch out for.

1. You're on the right track to be concerned about entity. When doing a 1031 exchange the taxpayer for the old property must be the same as the tax payer for the new property. I'm not totally sure but I think the ownership of your old property is in an LLC that you and your first partner are members of. That LLC is the tax payer for that property because all of the activity of the property is on the tax return of the LLC.

That means that when purchasing the new property that same LLC needs to be the tax payer of the new property.

If the tax payer for the old property is your partner and your LLC as tenants in common then each of you own 50% of the property So the two of you can go together or you can separate. But yes the tax payers must match. So there's one issue.

2. The taxpayer doing the 1031 exchange has two requirements reinvestment wise to avoid all tax.  First it must purchase at least as much as the net sale.  And second it must use all of the net proceeds in the next purchase or purchases.  So your second issue is making sure that each entity is purchasing the right amount of real estate.  You and your partner going together on the 1031 need to buy $115K of new real estate.  That doesn't look like a problem with the size of your purchase.  But it's the possibilities that come with  that you want to examine.

1. You and your partner could purchase enough real estate in the 1031 to satisfy the exchange. The remainder of the 2/3rds of yours could be put into a new lLC as a tenant in common with your LLC. And your new partner could also take title to their 1/3rd as a tenant in common to your LLC and the new LLC.

2. Or the two of you could take title to 2/3rds of the new property and your new partner take title to 1/3rd in the new LLC as a tenant in common with you and your partner. Then after the exchange is complete you and your partner could dissolve your LLC and contribute the new property to the new LLC so that now that new LLC owns 100% of the property and you and your partner and the new partner are equal members of the LLC.

3. Or an even simpler thing would be to bring your partner into your LLC now. Then sell, 1031 and buy in the same LLC. But this LLC now has three members. Then if you want to again you could dissolve it and contribute into a new LLC.

There's plenty of ways to make this 1031 work.  Just need to know your goals and what is most efficient for you considering where you're wanting to get to.