1031 to an LLC you own a share of - does it make sense?

[Daniel Dietz]

I do most of my rental property investing in a 3-Way LLC. One of my partners also owns several other properties on his own that he would like to sell either to me or to our LLC. Down payment funds could be an issue. Part of his goal is to reduce his time commitment in owning them on his own, and to tap into a bit of his equity for other adventures. The thinking of selling them to the LLC would be that he would still have a 'share of the property' but spread the work load out. He is interested in doing a 1031 Exchange if he can find a way to do it into a more passive investment such as the LLC and having two partners to share the load.

So... my question is could he sell his property to our LLC and 'carry a second' of some sort with his equity he has as seller financing as the LLCs down payment funds? The numbers look like this;

165K Value - 65K outstanding balance = 100K of equity.
New LLC loan of 80% or 135K
That new 135K pays off his existing loan of 100K and puts 35K in his pocket
LLC pays him 5% interest only loan on his equity above and beyond the bank loan (the seller carry part)

It is kind of like 100% financing to the LLC, which our lender is OK with as we have all of our LLC loans with them and the numbers make sense on this one.

So it seems that from his 165K sale he is putting 35K in his pocket which is taxable, 45K into the new property in the note to the LLC and 30K into the new property on the 30K interest only loan he would carry.

Is that potential to make use of a 1031 exchange in this case?

Thanks, Dan Dietz