Though 1031 exchange rules provide the requirement for who the Taxpayer is and can be in a 1031 exchange, Section 1031 does not provide the absolute definition. Rather the inference the Taxpayer is the same is found in Section 1033.
1031 Exchange Rules
1031 exchanges can be initiated by a variety of parties. Which party is on title to the relinquished (old) and replacement property is critical. 1031 exchange rules require the Taxpayer who sells is the Taxpayer who buys. The tax return that sells is the tax return that buys. So what happens given:
- A single or multi member limited liability company;
- Husband and wife;
- Taxpayer Death;
- Corporation.;
- Grantor Trusts.
Limited Liability Company
The sole member of a single member limited liability company (smllc) can hold the old property in the sole member’s name and the replacement property in the smllc or vice versa. This is provided the state law allows a smllc.
If a multi member limited liability company or partnership is on title to the relinquished or old property, the entity must be on title to the replacement property, not the individual partners. The partnership may change from a general partnership to a limited partnership or limited liability during the exchange without effecting the 1031 exchange.
Drop and Swap
What happens if in a two member limited liability company (mmllc) one member wants to go forward in a 1031 exchange and the other wants to cash out? The IRS has become more attentive to the drop and swap of old when partnerships and multi member limited liability companies dropped ownership to the individual members allowing one member to go forward in a 1031 exchange while the other cashes out. On Form 1065, Schedule B, questions 13 and 14, the IRS is now asking whether in the current or prior tax year, did the partnership or mmllc distribute property to another entity or to any partner in a tenancy in common interest.
Though IRS has not provided a specific time frame, a one year hold prior to or post the acquisition is suggested to support the intent of holding for investment.
Husband and Wife
Given husband and wife are on title of the old property, then both should also be on title to the replacement property. If only the wife is on title to the old property, then the new property should also be titled to the wife. Latter, once the exchange is “old and cold” the husband can be added.
Taxpayer Death
If the Taxpayer dies after initiating a 1031 exchange in either a reverse or forward exchange, the Taxpayer’s estate or trustee can complete the exchange.
Corporation
If a corporation and not its shareholders are on title to the relinquished or old property, then the corporation must be on title to the replacement property. If the shareholders are on title to the old property, then they must be on title to the replacement property and not the corporation.
Grantor Trusts
A revocable living trust or “grantor” trust may be on title to the replacement property while the Taxpayer is on title to the old or relinquished property and vice versa. For federal tax purposes revocable living trusts or “grantor” trusts are not considered separate entities from the Taxpayer.
Conclusion
When planning a 1031 exchange, the same Taxpayer requirement must be followed. If considering acquiring the replacement property in a different entity, planning is critical along with a solid understanding of the exceptions.
Is your company selling a commercial building or real property and the acquiring titleholder is different? Do you have a question how this impacts your 1031 exchange?
The Certified Exchange Specialist on staff has been accommodating simple and complex 1031 exchanges for professional advisor’s and their domestic and foreign clients since 2003. If you have any questions regarding multiple owners, call our office at 1-800-227-1031 or start your free consultation above.
