Start with the taxpayer and title holder
A limited liability company (LLC) or partnership can own real property in a 1031 exchange. The tax classification can change the analysis.
Identify the taxpayer that transfers the relinquished property. Then, identify the proposed owner of the replacement property.
Do not change ownership before advisor review. An entity change can affect the proposed exchange.
An LLC can have different tax classifications
The Internal Revenue Service can treat an LLC as a disregarded entity, partnership, or corporation. The federal tax classification depends on the facts and elections.
The LLC name alone does not give the complete tax answer. Ask the tax advisor to confirm the current classification.
A partnership interest is not qualifying real property
An exchange of a partnership interest does not qualify as a like-kind exchange. This rule applies to general and limited partnership interests.
The partnership can own qualifying real property. The partnership and its partners can have different transaction goals.
Ask the tax and legal advisors to resolve those goals before a sale contract or property transfer.
Information for the advisor review
- The current deed and title report.
- The entity formation documents.
- The current federal tax classification.
- The ownership percentages.
- The partnership or operating agreement.
- The sale and purchase contracts.
- The planned owner of replacement property.
- Any planned distribution or ownership change.
- Any related-person transaction.
- The expected closing dates.
Questions that need advisor decisions
- Which taxpayer owns the relinquished property for federal tax purposes?
- Which taxpayer will receive the replacement property?
- Does a disregarded entity affect the title plan?
- Do the partners have different sale or exchange goals?
- Will a distribution or contribution occur near the exchange?
- Do related-party rules apply?
- Does the plan involve an exchange of a partnership interest?
The exchange team can coordinate approved documents. The exchange team does not design a partnership tax plan.
Can an LLC complete a 1031 exchange?
An LLC can own qualifying real property. Ask the tax advisor to confirm the LLC's federal tax classification and the taxpayer identity.
Can a partnership interest qualify?
No. An exchange of a partnership interest does not qualify as a like-kind exchange under the general federal rule.
Can one partner exchange while another partner receives cash?
This plan needs tax and legal design before the property sale. Do not use a generic answer for a specific partnership.
Can I change the entity before closing?
Do not change title or entity ownership without advisor review. The change can affect the taxpayer and exchange structure.
Request an early entity review
Contact the tax advisor and attorney before a contract or transfer. Then, give the approved ownership plan to the exchange team.
This page gives general information. It does not give tax, legal, partnership, entity, investment, accounting, or financial advice.