How to Problem Solve 1031 Exchanges Involving LLCs

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.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

Fixing the 1031 Exchange Seller-Backed Financing Problem

Many years ago, we did a 1031 exchange for a client who had a relinquished property that was a real stinker. The only way to offload the property was to seller-finance the buyer via a promissory note. This creates a problem if the ultimate goal is capital gains tax deferral with a 1031 exchange because you need to maintain or increase your equity when exchanging into a replacement property.

The solution: cash is king.

The client brought cash to the closing to loan to the buyer so that the intermediary still received the same amount of net proceeds. This allowed the equity to be cleanly traced from the relinquished property, through the qualified intermediary, to the replacement property. This is a great solution to the seller-backed financing problem that can arise during a 1031 exchange, but it does require you to have a lot of cash on hand.

Like-Kind Exchange Qualified Intermediaries

CPEC1031, LLC facilitates like-kind exchanges under section 1031 of the Internal Revenue Code both in Minnesota and across the country. Our qualified intermediaries are here to help you understand all the nuances of the 1031 exchange and guide you through the process so that you can defer 100% of your capital gains tax burden. Reach out to our team today to get help deferring your taxes in a 1031 exchange transaction. You can find us at our primary office location in downtown Minneapolis.

• 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.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

Why Would You Want to Conduct a Reverse 1031 Exchange?

A reverse exchange is a 1031 exchange in which you acquire your replacement property first and then sell the relinquished property second.

Why would you want to make your 1031 exchange more complicated by buying first and selling second? Why not just do a standard forward exchange?

One word: certainty.

A reverse exchange provides a level of certainty that’s absent from a typical forward exchange.

There is a lot of risk when you sell your relinquished property in a 1031 exchange and then have only 45 days to identify in writing what you want to acquire and 180 days to close on it. If you’re not prepared, you’ll be running around like a chicken with its head cut off trying to find replacement property. But if you think ahead like a chess player, you may want to lock down a replacement property by acquiring it through a qualified intermediary and have them hold it for up to 180 days under the reverse exchange safe harbor.

MN 1031 Intermediaries

At CPEC1031, LLC our Minnesota 1031 intermediaries are here to help you through the specifics of your next like-kind exchange under section 1031 of the Internal Revenue Code. We have more than twenty years of experience facilitating like-kind exchanges across the United States and are well-equipped to help you manage all the details of your next exchange. Contact us at our Twin Cities office today to learn more about the 1031 exchange process and see if you are a good candidate for capital gains tax deferral under section 1031.

• 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.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Deadlines & Your Federal Tax Filing

In any 1031 exchange, you have 180 days from the start of your exchange to the finish of your exchange. However, this can get complicated by your federal income tax filing deadline.

If you start your 1031 exchange late in the year, you will find that your exchange period actually ends not at the 180th day after starting your exchange, but at the due date for the filing of your federal tax return. Let’s say you started your exchange on December 31st and you’re a partnership that files taxes on March 15th. In this situation you’re not going to get the full 180 day time period to complete your exchange unless you file an extension for your federal tax return. The same thing applies to individuals who file on April 15th. This is a real trap for the unwary.

I tell real estate agents to notify the other professionals that are in the client’s sphere (including the accountant) to let them know about the 1031 exchange so they can file for an extension if need be. The left hand and the right hand need to be working together and the advisors of the 1031 taxpayer need to be in lockstep throughout the process.

Minnesota 1031 Exchange Company

CPEC1031, LLC is a Minnesota-based 1031 exchange company that provides qualified intermediary services throughout the state and across the country. Our team of 1031 professionals has more than twenty years of experience working with taxpayers on their 1031 exchanges. We can help prepare your 1031 documents and answer all of your 1031-related questions before, during, and after the process. Contact us today to learn more about our 1031 exchange services and see how we can help you through the details of your next exchange.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Video – 1031 Exchange Rules of the Road

There are several basic rules of the road when it comes to 1031 exchanges.

• It’s important to remember that partnership interests cannot be exchanged under section 1031 (generally speaking).

• Many people want to cash out and take money off the table in a 1031 exchange. That triggers taxable boot and will invalidate the exchange.

• And then there’s the issue of qualified use in a 1031 exchange. 

Let’s imagine that you exchange your south Minneapolis apartment building and buy an oceanfront condo in Sarasota, FL. You then plan to rent out that property for a number of years. Your initial intent is to hold that property for investment or business purposes (even though your long-term intent may not be clear). How long should you wait before converting that property to personal use? The safest answer is the longer the better.

We have had clients who have moved into their replacement properties and subsequently been audited so this is something you need to be aware of as a possibility.

There are IRS authorities (private letter rulings) that seem to indicate that two years is the standard minimum period of time that you should hold a replacement property before converting to personal use. To be extra careful, it’s a good idea to go longer than that two year minimum if possible.

Consider This Hypothetical:

You move into your Sarasota oceanfront property and then a better property becomes available a few years later. You want to sell that Sarasota property as your principal residence and purchase the new property. There’s another code section (121) that deals with the proceeds from the sale of one’s personal residence. Can you take the full 121 exclusion ($500K if you’re married, $250K if you’re single) on a property that you 1031 exchanged into? You used to be able to do this, but the rules have changed. Now you only get a fraction of the exclusion amount based on the ratio of time you rented the property out and the time you occupied it as your home. Let’s say you rented the property out for two years and then occupied it for another three years. In that situation, you would only get three-fifths of the 121 exclusion. The other thing to be aware of is that you can’t do a 1031 exchange and then do a principal residence exclusion until you wait five years. Once you 1031 into the property you have to wait five years before you take a principal residence exclusion on that particular property. Additionally, the principal residence exclusion does not exclude gain from the recapture of depreciation.

Rather than selling your principal residence and not getting the full exclusion and having to recoup the depreciation, you could elect to continue deferring your capital gains taxes in a 1031 until you die. When you die, your heirs will receive your property with a stepped up basis to the fair market value at the time.

1031 Exchange Company in Minneapolis, MN

CPEC1031, LLC works with real estate investors across the United States on 1031 exchange transactions that help defer capital gains taxes. With more than two decades in the 1031 exchange industry, our qualified intermediaries have the detailed knowledge necessary to ensure your exchange satisfies all the requirements of section 1031 of the Internal Revenue Code. Get the help you need on your next 1031 transaction by contacting our team. You can find us at our primary office located in downtown Minneapolis. Note that we work with clients who own property all over the country.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved