1031 Exchange from LLC to an Individual?

[gjasons4]

I am a 1/6 partner in an LLC with my aunt, uncle and sister. The LLC owns rental property up in Oregon. The LLC plans to sell the rental property located in Oregon. Can I do a 1031 Exchange and purchase rental property in California changing title from the LLC to myself (an individual)?

Also, are there any issues doing a 1031 exchange from Oregon to California?

 

[FlyingRon]

1031 doesn't care what states the property are in. However, I'm not sure what you're trying to do. A 1031 allows you to defer the capital gain from the sale of one property into another. If the LLC owns the property and wants to sell it and by another, they can do the exchange. Changing the title would essentially be the LLC selling/giving the property to you. It has nothing to do with a 1031 exchange.

If it is an arms length sale, the LLC would now need to pay the capital gain on the effective basis (going back to the original property, and taking into account all the depreciation that applied). If it's not an arms length sale (and it is unclear why the other 5 out of 6 owners would be stupid enough to do that), then you take over the existing basis.

What are you attempting to do?

 

[gjasons4]

The LLC owns two rental homes and a ranch. Member A of the LLC want’s to buy out the others (including myself) and own the ranch out right (as an individual). Member A of the LLC also owns a separate rental property outside of the LLC. The sale of the two rental properties owned by the LLC, plus the sale of the rental property owned by Member A would be used to buy out the other members of the LLC including myself. There has been appreciation in the rental properties owned by the LLC. At this time I no longer want to be part of the LLC but would like to reinvest my portion of the earnings. I was assuming a 1031 exchange would be the best way to do this to avoid taxes? Since the title of the current rentals are in the name of the LLC I am not sure if I can do a 1031 exchange in my personal name?

 

[adjusterjack]

I suggest you consult a tax pro who specializes in 1031 exchanges.

 

[FlyingRon]

It is always advisable to contact a person who handles 1031 exchanges. There are a few pitfalls that can occur even in a legitimate exchange that can invalidate the 1031 treatment.

You can't do what you want to do. The fundamental principle in the 1031 is that all the proceeds from one sale go into the acquisition of the exchanged property. You can't take any boot out of it either in cash or in things like "buying out all LLC members."

 

[HRZ]

Ask a legal pro who does 1031s ...I don't know the answer, but my guess is the steps to unwind the LLC such that you can do a 1031 on your separate interests are going to cost prohibitive , if they exist at all, compared to just paying the capital gains taxes .

And as posted, to personally accept a buyout and then later reinvest the funds is not consistent with 1031 rules .

 

[LdiJ]

The LLC owns two rental homes and a ranch. Member A of the LLC want’s to buy out the others (including myself) and own the ranch out right (as an individual). Member A of the LLC also owns a separate rental property outside of the LLC. The sale of the two rental properties owned by the LLC, plus the sale of the rental property owned by Member A would be used to buy out the other members of the LLC including myself. There has been appreciation in the rental properties owned by the LLC. At this time I no longer want to be part of the LLC but would like to reinvest my portion of the earnings. I was assuming a 1031 exchange would be the best way to do this to avoid taxes? Since the title of the current rentals are in the name of the LLC I am not sure if I can do a 1031 exchange in my personal name?

Do see an expert in 1031 exchanges, but I am pretty sure that you cannot do what you want to be done. The LLC as an entity is the one that is going to be selling the property, and I don't see how that can translate into a 1031 exchange with you, as an individual, owing the new property purchased.

 

[HRZ]

A drop and swap using a 1031 from LLC to an individual interest may be possible but I urge you to contact a pro at 1031 matters before you undertake any such adventures

 

[Taxing Matters]

Do see an expert in 1031 exchanges, but I am pretty sure that you cannot do what you want to be done. The LLC as an entity is the one that is going to be selling the property, and I don't see how that can translate into a 1031 exchange with you, as an individual, owing the new property purchased.

You are correct that the partner in a partnership (which is how a multi member LLC is viewed for federal tax purposes unless an election is made to treat it as a corporation) may not exchange his/her partnership interest for another property in a like kind exchange when the LLC sells the property it owns. The LLC would have to do the like kind exchange.

However, if the LLC members are agreeable, they could dissolve the LLC and convert ownership of the property to tenants in common (TIC) before the sale takes place. Then the partner who wanted to do a like kind exchange can do that with his/her share of the property. This is known as a drop and swap, and needs considerable advance planning to achieve.

A swap and drop transaction could also be done; the LLC does the exchange first and then they convert from the LLC to TIC ownership of the new property afterwards, with those wanting cash selling out after the conversion.

Note that the IRS has agressively attacked both kinds of transactions in the past, and engaging in such a transaction raises the risk of an audit.