Last updated on June 21st, 2021 at 11:55 am
Since many real estate investments are held in an LLC rather than by individuals, there are questions about how to do a 1031 exchange with LLC. Specifically, if you’re part of a larger ownership group, and some members want to do a 1031 exchange and others don’t, what can you do? This guide to the 1031 exchange with LLC will help.
Can I Do a 1031 Exchange with LLC Member Interest or Partnership Interest?
If you’ve structured an LLC as a partnership, anything owned within that LLC is considered personal property and is not eligible for the 1031 exchange. Section 1031 specifically states that that the exchange of partnership interests is not OK to use in an exchange.
That said, you can do a 1031 exchange with an LLC on the “entity level.” More simply, if the entire partnership sells the existing property, stays intact as a partnership, then purchases a replacement property together, this is allowed. This is because Section 1031 says that the 1031 exchange must be done by the “same taxpayer” which can be extended to be an LLC.
Is a Single Member LLC able to do a 1031 Exchange with LLC?
Yes. If you are the only partner in a single-member LLC, you’ll have no issues if you’re the only purchaser of the replacement property. Additionally, in community property states, a married couple who are the sole members of an LLC are considered single-member LLC’s for 1031 exchange purposes.
What if Some Members of an LLC Want to Exchange, But Others Don’t?
This is a much more complex situation. We recommend getting in contact with a tax and/or legal advisor. A 1031 exchange can still be done, but there are multiple strategies and timing issues to consider. When some partners want to get out of a property, but others want to do a 1031 exchange, this is called a “Drop and Swap.”