Perhaps the most important and misunderstood topic when it comes to 1031 exchanges is LLCs.
Many people own real estate together, often in an LLC. A multi-member LLC can be taxed as a partnership, or it can elect to be treated as a corporation for tax purposes.
In the partnership realm, you have a lot of options when it comes to dividing up the property. Let’s say that you’ve recently enjoyed a step-up in basis after your ancestor died and you inherited their partnership shares with a stepped-up basis. You are probably fine doing a taxable sale because your step-up in basis means you have very little gain. The other partner who has been in the LLC from the beginning has very low basis and does not want to do a taxable exchange – they would prefer to do a 1031 exchange. How do we deal with that in the context of an entity owning the property?
One way to deal with it is to do a simple drop-and-swap in which you take the LLC and deed the property out to the partners as tenants-in-common. This option comes with some level of risk.
An alternative would be for the 1031 exchange-minded partner to stay in the LLC and do the exchange under its banner. If the other partner wants to leave the LLC, you can do a redemption and deed that partner out as a tenant-in-common, while still keeping them in the partnership (perhaps at just 1% ownership) so that the LLC retains its partnership characteristics. If your partner does not agree to this arrangement, concurrent with their departure from the LLC, you could simultaneously gift 1% to your spouse or someone else so the entity still retains two owners.
708 Spin-Off
You could also do what’s known as a 708 spin-off. In this arrangement, the original LLC spins off a subsidiary containing half of the real estate. That subsidiary is owned 99% by you and 1% by your old partner. The old LLC is then owned 99% by your old partner, and 1% by you. Both of these LLCs have the same DNA and can do separate 1031 exchanges.
Contact a 1031 Exchange Company
Contact a 1031 exchange company like CPEC1031, LLC today to get your 1031 exchange up and running. Section 1031 allows you to defer taxes when selling like-kind qualifying real estate. It presents a fantastic opportunity for investors to lever up into a bigger investment, move capital around into different areas, and defer capital gains taxes along the way. If you’d like to learn more about how a 1031 exchange can help you, contact the qualified intermediaries at CPEC1031, LLC to learn more about the process and see if you are a good candidate.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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