In a recent article, we talked about a few of the basic requirements for taking title to your replacement property in a 1031 exchange. Here are a few additional methods for taking title.
Single Member LLCs
QUESTION: Can a Taxpayer Purchase a Replacement Property in a single-member limited liability company that is disregard for federal tax purposes?
Yes. If the same taxpayer that held title to the old Relinquished Property also owns 100% of the membership interest in the LLC, then you may take title to your new replacement property through a single member LLC that is disregarded as an entity separate from its owner (unless it elects to be taxed as an association / corporation). Reg Section 301.7701-2 and 3. The sole owner of a limited liability company which is disregarded for tax purposes is in the same position economically as if he/she had taken title in his/her own individual name.
Married Couples & Single Member LLCs
QUESTION: Can a married couple buy their new Replacement Property in a single-member limited liability company?
If both spouses owned the old Relinquished Property together, then the IRS will allow them to take title together though a limited liability company that is a disregarded entity (owned solely by a husband and wife in a community property state, provided that they file a joint tax return together) to be titled on the replacement property. Rev. Proc. 2002-69.
The general rule is that they both take title to the replacement property in their individual capacity. However, the exception to the rule is for them to take title though a single-member disregarded entity that is disregarded for federal tax purposes. If the taxpayers live in a non-community property state, and the husband and wife hold the relinquished property jointly but wish to hold the replacement property in an LLC, they should form two separate single member LLCs.
Revenue Procedure 2002-69 permits a business entity that is wholly-owned by a legally married couple as community property to treat that entity, which has not elected federal taxation pursuant to either Subchapters C or S, as either:
- A disregarded entity or
- a partnership taxed pursuant to Subchapter K of the Internal Revenue Code.
Revocable Living Trust or Grantor Trust
For estate planning purposes a taxpayer may wish to take title to the replacement property in the name of his, her, or their revocable living trust. Or they may hold the relinquished property in a revocable living trust or other grantor trust and wish to hold the replacement property outside the trust. In either case, exchange tax deferment under IRC Section 1031 will be permitted. The trust is a disregarded entity and the taxpayer will file a single return using his own tax identification number, and not file a separate return for the trust.
- 1031 Hotline: If you have questions about 1031 replacement properties, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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