1031 exchange

[S T]

Had a call today from one of my realtor clients asking a general question.

Client enters into a 1031 exchange on rental property. Property given up is in the name of LLC (single member). On property being acquired in exchange, client would record in the name of the LLC. Client needs to obtain a mortgage on the property being acquired in the exchange. Lender just advised the client that they would not entertain the idea of writing the mortgage in the LLC name, it would have to be the individual name.

Question, how does that affect the 1031 exchange transaction?

Sandy

[Bees Knees]

From a federal income tax standpoint, a single member LLC that has not elected to be taxed as a corporation is a disregarded entity. That means it is not recognized as an entity separate from its single member owner.

So for all federal tax rules, including the 1031 tax free exchange rules, it is as if there was no LLC. The 1031 rules can apply even if the new property is legally titled to the individual and not the LLC.

State tax rules may be different if a single member LLC is not a disregarded entity for state tax purposes.

One way to solve it even if state rules are different is to liquidate the LLC. I don’t know of any state that says an LLC liquidation is a taxable transaction. All LLC assets revert back to the single member owner, who then transfers the asset tax free in a 1031 exchange. A little more complicated than just a simple exchange, but maybe that could solve the issue if state tax rules are different than federal.

Either way for federal tax purposes, the 1031 exchange should not be a problem.

[wexeter]

Bees Knees is Right

.....on the money. So to speak.