An Important Question About 1031 Exchanges & LLCs

1031 Exchange LLC

If you have a client who is a sole owner of an LLC that is doing a 1031 exchange, can you join the LLC after the client closes? Or can the ownership structure of an LLC never be changed once it's been involved in a 1031 transaction? This is the topic for today’s article.

1031 Exchanges & LLCs

In this scenario, the 1031 LLC should remain a single-member LLC and not admit new members because it will change the “taxpayer” owning the Replacement Property.

Tenancy-in-Common

One option is to set up a tenant-in-common purchase on the Replacement Property with two co-purchasers: (1) 1031 LLC buyer; and (2) Non-1031 buyer; each with a proportionate ownership percentage based upon the money each contributes for the down payment. You will not want to file a partnership tax return for the joint ownership of the Replacement Property (so talk to your CPA). Also, you may want a tenant-in-common agreement between the owners (so talk to your attorney).  Further, you probably cannot have the tenant/renter pay part of the rent to one co-owner and part of the rent to the other co-owner, so you may want to have a management company to collect all of the rents, pay the bills for the owners and then distribute out incomes proportionate ownership percentages.

As always, it’s important to get legal and tax advice form your CPA and attorney.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

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