5 Ways to Reconfigure an LLC to Allow Members to Do 1031 Exchanges

In this article, we are going to discuss a few ways to reconfigure an LLC that is taxed as a partnership to allow one or more of the members to conduct 1031 exchanges.

Jettison the Other Guy Out of the LLC

In this scenario, you split the real property into two parts. The exchange minded owner(s) keeps the old LLC, and the non-exchange minded owner is moved into a new LLC. For example 25% of the real property is retained by the old LLC, and 75% of the real property is transferred to the new LLC. Split the 1099-S for tax reporting. This allows the exchange minded owner to do an exchange, and the other guy to take his money and pay the taxes.

Partnership Installment Note (PIN) Solution

You could also split up by buying out the non-exchange minded owner interest in the LLC with an installment note. After the sale closing is complete the QI gets in 25% of the net proceeds directly in the exchange minded owner’s separate, segregated 1031escrow account; and 75% of the sale proceeds is received by the QI in another different account, and is then used by the QI to pay off 90% of the installment note in the current year, and the remaining 10% (plus interest due) in the subsequent year.

Keep the Old LLC Intact and Complete the 1031 AND Split up LLC Down the Road

Fully defer the gain and complete the 1031 at the LLC level with all members remaining in the entity. After the dust has settled on the 1031, split up the LLC and distribute out the UPREIT shares to the owners – Later each owner could sell portions of the UPREIT in small allotments to stay under the preferential tax rates (when retired).

Partnership Division 708 Spin Off

A 708 spin-off would allow both owners to do separate exchanges. A 708 spin-off is when an LLC that is taxed as a partnership divides into two or more partnerships/limited liability company [§708(b)(2)], and each is considered to be a continuation of the predecessor entity so that the holding period or qualified purposes requirement is met by all entities. Each entity has the same partners as owners, but the ratio of ownership in each entity is skewed/weighted to benefit one partner.

Crude, Simple Drop and Swap

A drop and swap exchange allows real estate owners to "drop" their ownership structure out of an "entity level" to a co-ownership as tenants-in-common (deed out real property from the entity to the individuals) – turning former partners into tenants in common in the underlying real property. When the property is sold, the proceeds are divided proportionally, and co-owners can now either cash out and pay their taxes or reinvest into another investment property through a qualified intermediary (QI) and still defer taxes. This method has some significant issues regarding holding periods and qualified use requirements for a 1031. PRO TIP: Get the banks consent to the change in ownership if there is a mortgage on the relinquished property; and refrain from acting like a partnership or de facto partnership.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - Seller Backed Financing in a 1031 Exchange

Seller-backed financing issues are coming up quite frequently so I thought I’d make a quick video to talk about when you’re doing a 1031 exchange and the buyer wants you to sell it to them on a contract for deed or with seller-backed financing. In a 1031 exchange, the seller wants to take all of their equity and reinvest it into a replacement property of equal or greater value, so they need to redeploy their cash. The problem with a lot of seller-backed financing arrangements is your cash isn’t released – it’s loaned to the buyer. Therefore, you’re not coming up with as much equity for redeployment into the replacement property. One easy way to fix this is to simply bring an equivalent amount of cash from your own pocket to the relinquished property closing and loan it to the buyer so that the net proceeds that go out to the qualified intermediary are the same as they ordinarily would be if there was a cash purchaser. We call this the “cash is king” solution. This is just one of many ways to approach 1031 exchanges involving seller-backed financing, but this is typically the easiest.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Where to Find 1031 Exchange Replacement Property

Finding a great replacement property is often the most difficult part of a 1031 exchange of real estate. In this article, we are going to offer up a few tips for finding your ideal 1031 exchange replacement property.

Look in Different Locales

Many taxpayers starting their first exchange begin their replacement property search in the same general geographic area as their relinquished property. While there’s certainly nothing wrong with that, it is quite limiting. When you are looking for replacement property, expand your search to different cities or even different states. 1031 exchanges can be conducted between US states and locales so there’s no reason to limit your search.

Look in Different Market Sectors

You should also investigate properties in different market sectors. Nearly all investment real estate is considered like-kind to all other investment real estate. That means you can 1031 exchange between property in different industries and market sectors. In fact, this is quite a common practice among taxpayers. If you’re selling a retail property, perhaps you should consider a rental property like a duplex or apartment complex.

Contact a 1031 Intermediary

If you are considering a like-kind exchange for your investment property, the first thing you should do is contact an experienced intermediary who can make sure you are fully prepared before you even begin the process. 1031 exchanges can get complicated quickly, but the qualified intermediaries at CPEC1031, LLC make things as easy as possible for you. We can answer all of your questions, prepare the required documents, and walk you through the 1031 exchange process from start to finish. Contact our team of professionals today to get your exchange off the ground. We are located in Minnesota, but provide 1031 exchange services across 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - What Financial Planners & Investors Should Ask a DST Wholesaler or Syndicator

In this video, we’ll be talking about what financial planners and investors should be asking about the DST from the wholesaler or sponsor that’s selling them the DST interest.  

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

The Benefits of Working with a Qualified Intermediary on Your 1031 Exchange

A qualified intermediary is an essential part of any 1031 exchange, but many people are unaware of the true benefits of hiring an intermediary. In this article, we are going to discuss a few of the many benefits of working with a qualified intermediary on your 1031 exchange of real estate.

A Deep Pool of 1031 Exchange Knowledge

Perhaps the greatest benefit of working with a qualified intermediary is the deep pool of 1031 exchange knowledge you have access to through them. Qualified intermediaries are professionals who specialize in facilitating 1031 exchanges of real estate. They are an in-depth knowledge of the process, regulations, and guidelines. They can answer all of your questions that relate to 1031 exchanges.

Ensuring Your Exchange is Successful

1031 exchanges may appear simple, but they can get complicated quickly and not all exchanges are ultimately successful. A qualified intermediary can examine the details of your specific property and ensure that you are set up for a successful exchange with 100% tax deferral.

Attending to the Details & Documents

There are many documents and details that need to be lined up during the 1031 exchange process. This can be overwhelming for many taxpayers. Let a qualified intermediary attend to all the details and documents for you.

1031 Exchange Intermediaries

Looking for help with your 1031 exchange? The qualified intermediaries at CPEC1031, LLC have the skills and resources necessary to make sure your exchange of real estate is a success. Our team can guide you through the process, prepare necessary documentation, and answer any questions you may have along the way. We’ll make sure you are fully prepared when it comes time to close on your properties. Our primary office is located in Minneapolis, but we work with clients throughout the country who want to defer their taxes when selling qualified real property.