One structure we have often seen in the context of the sale of a property in which some investors, but not all, want a similar exchange processing is the so-called “drop and swap” structure. Below this structure, this “drop and swap” strategy is – by far – the most common when it comes to an LLC that sells investment real estate, where some members do not want 1031x and others. Do you have more questions or concerns about partnerships in a 1031 exchange? Important: these are not considered tax partnerships and do not face the same challenges from the perspective of 1031. You can call some of the largest national companies that act as 1031 trading intermediaries, and they can guide you through the process. Comment: The end of the question said that he had recently sold a condo. If he had sold and collected the proceeds, would that not exclude the possibility of an exchange of 1031, since he needs a qualified intermediary to assist in the exchange process? This point should have been clarified before the rest of the answer or, at the very least, mentioned in the article. Starting with the initial question, we first ask how many members want to stay together as a group. If several members want to reinvest together, we can propose a slightly different strategy (with less tax risk!). The LLC is reserved for members who want to pay, not 1031x.
The other members remain united. The LLC manages a 1031x and outgoing members, now tenant-in-common, are paid at closing and paying taxes on their profits. Unfortunately, the IRS makes it difficult for partner real estate investors to follow their own paths. In particular, the rules prohibit 1031 exchanges that involve the purchase or sale of partnership shares. [See section IRC 1031 (a) (2)] However, partners often have different views on what to do with the sale and what to do with the proceeds of the sale. One may want to continue doing real estate, the other wants to liquidate and start planning the estate. However, if the LLC is dissolved approximately nine to twelve months before the sale and divided into separate partnerships, each partner can use a 1031 scholarship if they wish, or take the money, pay their taxes and make the grandchildren happy. Our answer: yes, if the seller signed a contract and did not enter into it at the time of the sale, the seller can still make a 1031 exchange. However, as you rightly noted, if you have concluded the sale of the property and you have the money from the sale in hand, you have no luck and you cannot try to initiate a similar exchange. As noted above, it must have been held for the exchange of real estate by the subject for use in a business or for investments. Therefore, if, on the eve of the closing of the sale of the abandoned property, a tax is rehabilitated to the outgoing member, it would be difficult to say that she personally kept the property for a real period of time.
However, if outgoing members wish to pay, the “held for” requirement is not an issue, as the exchange takes place at the LLC level and the LLC has clearly considered the property to be a qualified use for a considerable period of time. It is not important that the outgoing members have not met the conditions of the detention period, as they do not wish to obtain exchange status. It is possible for all members of the partnership to stay in the LLC structure and sell together. They should stay together until the purchase of the replacement property.