1031 Exchanges with Disregarded Entities

1031 disregarded entity

Consider the following 1031 exchange example we recently ran into with a client: The client and his wife were looking to sell a 4-plex held by an LLC that they both owned together (100%). They wanted to use those funds in a 1031 exchange to purchase another apartment, but with a different LLC name that they would also both own 100%. Would this be allowed under 1031 exchange rules since more than one person owns the entity?

Disregarded Entities

The same taxpayer that owned the old Relinquished Property must receive the Replacement Property to complete the 1031 exchange. The question brings up the issue of disregarded entities.

The IRS will only allow an LLC that is a disregarded entity (owned solely by a husband AND wife in a community property state, e.g., California) to be titled on the replacement property. Rev. Proc. 2002-69. In this case a multi-member LLC owned by you and your wife sold the Relinquished Property. It is not a disregarded entity.

The old LLC owned the Relinquished Property, and the old LLC should be the owner of the new Replacement Property.  You can do this by changing the name of the old LLC by filing a name-change amendment with the Secretary of State; or by having the old LLC be the sole owner of the new LLC (which would also have to be a disregarded entity).

Please check out this article on 1031 exchanges, LLCs, and married couples for more information.

  • 1031 Hotline: If you have questions about 1031 exchanges and disregarded entities, feel free to call me at 612-643-1031.

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