1031 Exchange Vesting Issue

[H. James Lee]

Piggybacking this great post:

https://www.biggerpockets.com/blogs/5070/37244-103...

Question #2: Can my spouse and I sell a property that we own personally and buy a replacement property in a LLC that is owned by both of us?

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Answer: It depends - If you live in a community property state (Texas, California, Washington, Arizona, Wisconsin, Nevada, Louisiana, Idaho and New Mexico), the answer is yes. If you live in any other state, the answer is no. This is due to a special rule under Revenue Procedure 2002-69 that states that a LLC owned by a husband and wife in a community property state is also considered to be a disregarded entity and for tax purposes, the property is treated as if it is owned directly by you and your spouse. So, the party that started the 1031 exchange is the same party that completed it.

My Story:

My wife and I sold a property in New York that is under our individual names and we are doing a 1031 Exchange and still within the 45 day identification window. We are most likely going to purchase a commercial property with 2 other partners in a TIC structure out in Houston Texas. Our QI is based in California. We were misinformed about being able to purchase the replacement property as an LLC where my wife and I will be 50/50 members. We now learned that due to the fact that we live in NY and it not being a community property state, the new LLC will not be considered a disregarded entity, and we will have a vesting issue if we sold as individuals and purchase as an entity other than the individuals who sold.

So my question is how can I make this deal happen? I would like to take ownership in an LLC. We, the 3 parties in the deal, have the ability to purchase the commercial property without financing. Also, my relinquished property did not have any debt.

Can I purchase the property in a cash transaction and thus satisfy the 1031 exchange, transfer our interest in the TIC into an LLC and then cash out refinance to have funds ready for the next deal? Will doing this cause the 1031 exchange to fail?

Another suggestion made to us is that if we (husband and wife) in joint tenancy own the membership interest of the LLC (instead as 2 individual), would the LLC be considered a single member LLC and thus become a disregarded entity? How valid is this idea?

[Mark Creason]

@H. James Lee  @Dave Foster

James, 

I recommend talking to Dave Foster.  He might be able to help you.

Mark