combining 1031 and Drop & Swap and TIC? RE attroneys and CPAs?

[Ki Lee]

Hello BP!

Looking to connect with Drop & Swap expert - Real Estate attorney and/or CPA

Looking to combine Drop & Swap, 1031, and TIC purchase.

30,000 feet view-

-Ki and Daniel each owned their rental properties individually in their personal names
-Ki and Daniel each sold their rental properties in their personal names and are doing 1031 exchange
-Ki and Daniel decided to collaborate on the 1031 exchange by combining their funds to buy a larger deal for replacement asset.
-The 1031 QI advised that the best structure to do this is to take title to the replacement property as TIC.
-We have an apartment under contract and its in the Franklin County, OH
-Ki and Daniel each have our own individual, single-member, disregarded OH LLCs
-each OH LLC's are also owned by respective WY LLC's, also single-member and disregarded.
-The plan was for Ki's OH LLC and Daniel's OH LLC to take title as TIC for the replacement property, and each of our OH LLC's will be owned by our respective WY LLC's

NOW....

-We want to do a drop & swap where the seller puts the title of their asset under a new LLC, and then we buy the membership interest in the new LLC instead of "buying the property."  This can potentially avoid new tax assessment of the property that is triggered by a sale, thus saving taxes for the buyer, and saving the sellers transfer taxes.

- from our understanding, combining 1031 and Drop & Swap is possible when it's dealing with single buyer who takes 100% of ownership interest of the newly formed LLC as single-member and disregarded.

- what we want to explore is the possibility of doing the drop and swap and 1031 when we are purchasing the replacement asset as TIC.  So when we buy the membership interest of the new LLC, it will not be single-member LLC, but both of us will be owners of the newly formed LLC.  How can we structure this properly so that it's Kosher for the IRS and so that the integrity of the 1031 will not be compromised?

If there are any expert RE lawyers or RE cpa's out there, I'd love to connect.

[Bill Exeter]

Hi @Ki Lee, 

What you are proposing is not a drop and swap.  The drop and swap refers to the sale of your relinquished property where you drop the property out of a partnership into individual names as tenants-in-common and then sell and 1031 Exchange, which has certain risks to work through. 

The purchase of all of the outstanding membership (partnership) interests in a limited liability company so that it becomes a single member limited liability company (SMLLC) and a disregarded entity will work in certain situations. However, in your case, you have two individuals doing two separate 1031 Exchanges. There is no way for the two of you to acquire the SMLLC because it would be a two (2) member LLC and not a SMLLC or disregarded entity. It would be a deemed purchase of a partnership interest and not a purchase of a real estate interest.