1031 Exchanges from LLC and LP forms of syndication

[Buddy Holmes]

I attended a recent webinar where a syndication principal was cautioning about the 1031 exchange ability of LP and LLC entities.

He was saying the they must have a TIC form in order to conform to the 1031 rules. Specifically that the member or share holder often owns only a portion of an entity which owns Real Estate rather than actually owning Real Estate out right. Thus 1031 is only the exchange of Real Estate not shares in an entity which owes Real Estate. He seemed to say that they had a form of LP or LLC which allowed a TIC position but were able to have financing that did not bring the TIC issues into play.

Expert thoughts, please.  

[Dave Foster]

@Buddy Holmes, If the LP or LLC sells and does a 1031 exchange. Then all of the members of the LLC or LP are going along for the ride. Your position doesn't change because of any activity of the LP. If you are a member of the LP and the LP is doing a 1031. Then you are still a member.

Some syndications are finding this model to be really beneficial as it saves them substantial time fund raising for the next deal since the money from the current member investors moves forward in the 1031.  And they usually have clauses allowing you to sell your membership interest so you can leave if you want (you'll pay tax of course since the LP is the only one who can do the 1031 - you don't own property you own a company that owns property).

Now, if you are a TIC with the LP then you own your own real estate and can do with it what you want. The LP could 1031 its tic and you take cash. You could do a 1031 and the LP take cash. Or you could both 1031 your respective tic%s into totally different real estate.