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Can an LLC Do a 1031 Exchange Efficiently? (Explained)

Max Smith

Reading Time: 5 minutes

You may search for an alternative way to expand your business but need more cash. Then, a question may arise: “Can an LLC do a 1031 exchange?”

You may have abandoned or given up the properties of your LLCs to exchange or purchase something new. It will help you expand your business and get something more valuable for the future.

In this article, you will see who can use the 1031 exchange and what can be used for the 1031 exchange. Let’s scroll down!

Only a member of a single-member LLC can enjoy the 1031 exchange facility. The members of Partnserhsip Or Corporate LLC cannot make a 1031 exchange. Do you wonder why?

1031 exchange is an internal code of the IRS. Only a legal entity can apply for a 1031 exchange for business purposes—for example, an LLC, a subsidiary, or a company.

It’s not available to an individual. Undoubtedly, a member is an individual and cannot use the 1031 exchange.

But what about a single-member LLC? It’s a legal entity, but it has only one member. That’s where you can get the benefit!

As an only member, you can take the 1031 exchange for LLC. But in reality, it’s you who are handling all the staff. But you must be the only buyer of the property to fit the criteria of the 1031 exchange.

There is §301.7701-(3)(b)(1) of the Treasury regulations that allows a single-member LLC to be treated as a disregarded entity. It’s for tax-reporting purposes. 

It means the LLC owner also owns any real estate bought through the LLC. This rule helps members sell the original property on a 1031 exchange.

Moreover, members cannot use 1031 exchanges for real estate in a partnership LLC. They cannot sell or dispose of the partner’s interest. They are not eligible for replacement property through a 1031 exchange.

Furthermore, corporate stock is not allowed to enjoy the 1031 exchange facility. So, if you are a shareholder in a corporation, you cannot use the 1031 exchange for personal use.

So, what can you do to get a 1031 exchange facility if you own a multi-member LLC? Let’s see below.

  • Business Structure

1031 treatment excludes LLC membership interests. So, you must change your LLC structure. For instance, you can structure your LLC as tenants instead of members. You must have long-term plans and structure your ownership to utilize 1031 exchanges in the future.

  • Meet the Criteria

There are guidelines outlined in Revenue Procedure 2002-22, and you must stick to them. The taxing authority examines the ownership to ensure a joint tenancy, with TIC interests amendable to 1031 treatment.

  • Restructuring

You may change the structure of your business. So you can change the short- or long-term plans and make a suitable structure for the 1031 exchange. It creates a tenant relationship with the LLC.

Can I Buy a Business with a 1031 Exchange?

Most 1031 exchanges are used for real estate transactions. But you can also use a 1031 exchange to purchase a business. 

Buying an LLC is costly because of tax complications. That’s why you can use a 1031 exchange. It will help you acquire a company with the funds that you have.

In case you need guidelines on buying an LLC, you can read our article about how to buy an LLC.

The federal tax rules allow you to be a business or LLC using your 1031 exchange facility. As it’s an exchange transaction, you must sell a property or business. It can be like a chain of stores or a franchise. 

For instance, you can sell a business in one market to buy another in a different market. It can also be a similar kind of business or something different.

Moreover, you must fill out IRS Form 8824 to use the 1031 exchange. Then, submit the file with your tax returns for the year you sold the property.

You can follow some simple steps to complete a 1031 exchange.

  • Decision

You can take advice or hold meetings with other members and decide what to sell and buy through the 1031 exchange.

  • Tax Plan

Get the help of an expert service provider or qualified intermediary (QI) for a better tax plan to save money.

  • Selecting Property

You can put a property that will soon give up on the market.

  • Identifying Replacement Properties

You have a 45-day deadline to choose a replacement property before closing the abandoned property.

  • Closing Transaction

It’s time to close the abandoned property transactions.

  • Contract

You will sign an agreement for the replacement property.

  • Closing Replacement Property

Close on the designated replacement property within 180 days of the sold investment’s closing.

Lastly, you can buy a business using the 1031 exchange. There are many rules and regulations to follow in a 1031 exchange. 

If you fail, and if it is audited, you face trouble. The IRS will overturn your 1031 exchange. As a result, your taxes will be due, and you will pay penalties and interest.

Can You Do a 1031 Exchange in a Different State?

Yes! A 1031 exchange is allowed in any state in the USA. All the states recognize the 1031 federal tax code. So you can find a like-kind property in another state. 

For example, you may own a building in New York. You can sell that building and purchase one in New Jersey, California, or Colorado. So, a state-to-state 1031 exchange can be successful.

It’s a way to sell in one state and buy in another state. By using the 1031 exchange, you can get tax deferral benefits. 

Moreover, it’s better to know the different regulations at the state level before you go for the 1031 exchange—for example, clawback provisions, non-resident investor tax complications, and more.

Conclusion

So you get a positive answer to your question, “Can an LLC do a 1031 exchange?” But I recommend that you consult with an expert service provider. It will smooth your way to performing the 1031 exchange and reaching its full potential.

Frequently Asked Questions

Which states do not recognize 1031 exchanges?

Right now, every state, including DC, recognizes 1031 exchanges. Pennsylvania was the only state where 1031 exchanges were not allowed. But it’s changed now. From January 1, 2023, Pennsylvania will start to recognize 1031 exchanges.

Can you do a 1031 exchange on a primary residence?

No! The IRS does not allow a primary residence for the 1031 exchange because it’s not an investment. The primary residence is used to live in. It’s not in use for business purposes.

Does a 1031 exchange have to be an investment property?

Yes! 1031 is used to exchange business properties. It includes rental properties. For example, commercial buildings, vacant land, apartment buildings, single-family residences, personal property, a valuable painting, or gold coins. You cannot use the 1031 exchange for second homes, primary residences, or more personal properties.

Max Smith - LLC Formation

He is a seasoned entrepreneur and legal expert at LLC Formation Hub. With a stellar track record in both business and law, Max simplifies the complexities of LLCs. His practical insights, featured on LLC Formation Hub, empower entrepreneurs across the USA. Max merges business finesse with legal acuity to guide businesses toward success.


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