Conducting a 1031 Exchange with Real Estate Held in an LLC
You might decide to hold real estate in a limited liability company (LLC) for many reasons. Compared to other types of business entities, LLCs are relatively straightforward and require relatively little in terms of formal documentation. But, LLCs also provide liability protection, and if managed appropriately, an LLC can shield its owners (or “members”) from lawsuits related to the LLC’s property.
Limited liability companies can also conduct 1031 exchanges. With single-member LLCs, the process is largely the same as it is for individuals, though there are a few additional considerations. The same is generally true for multi-member LLCs, though issues can arise if one or more members disagree that a 1031 exchange is the best path forward. In any case, navigating the process successfully requires the assistance of a 1031 exchange intermediary who can assist with meeting all applicable requirements.
Preparing to Conduct a 1031 Exchange with Real Estate Held in an LLC
If you are interested in conducting a 1031 exchange with real estate held in an LLC, what do you need to do to prepare? Here are some key steps for starting the process:
1. Track Down Your LLC Documentation
One of the first steps to take when preparing to conduct a 1031 exchange with real estate held in an LLC is to track down your LLC documentation. To conduct your exchange, you will need the LLC’s official name and EIN, and if the LLC has multiple members, you will need to make sure each member plays his or her part in facilitating the exchange.
2. Make Sure All Members Are On Board
This brings us to step number two: If your LLC has multiple members, you will also want to make sure all members are on board with conducting a 1031 exchange. You do not want to run into issues during the exchange process that lead to delays and loss of tax deferral eligibility. You will want to make sure each member has a clear understanding of his or her personal tax implications (since LLCs are typically pass-through entities)—including any tax implications involving “boot” from the transaction.
3. Decide Which Type of 1031 Exchange Makes the Most Sense
If you are sure that everyone is on the same page (or if you own a single-member LLC), then the next step is to decide which type of 1031 exchange makes the most sense. There are three main options:
- A “traditional” 1031 exchange
- A delayed 1031 exchange
- A reverse or improvement 1031 exchange
Each of these options offers different benefits in different circumstances. An experienced 1031 exchange intermediary will be able to help you weigh your options so that you can make an informed decision about the best path forward based on your financial and business goals.
4. Make Sure You Know the Deadlines that Apply
Regardless of which type of 1031 exchange you choose, deadlines will apply. You should make sure you know these deadlines before you start the exchange process. Once the clock starts ticking, it won’t stop, and if you run out of time, you may not be able to secure tax deferral.
5. Develop Your Plan
Once you decide which type of 1031 exchange to pursue and have a clear understanding of the deadlines that will apply, the next step is to develop your plan. If you will be pursuing a “traditional” 1031 exchange or a delayed exchange, your plan may be relatively straightforward—you will simply be selling the LLC’s current property in exchange for another (while meeting the requirements for conducting a 1031 exchange along the way). However, if you are considering an improvement exchange, you will want to put additional forethought into your buildout, budget and timeline.
6. Start Looking at Replacement Properties
With a plan in place, it is time to start looking for a replacement property. However, keep in mind that you should not make an offer until you are sure that you can meet the timing requirements for conducting a 1031 exchange.
7. Engage a Qualified 1031 Exchange Intermediary
In all cases, conducting a successful exchange requires the services of a qualified 1031 exchange intermediary. An experienced intermediary will be able to guide you through the process and help you meet the applicable deadlines while also managing your exchange so that you can secure indefinite tax deferral. An experienced intermediary should be able to help identify any potential issues as well and should give you the confidence you need that your exchange will be able to withstand IRS scrutiny if necessary.
Contact an Exchange Intermediary at 1031 National Services
If you would like to know more about how a 1031 exchange intermediary can help with your LLC’s exchange, we invite you to get in touch. To schedule a free consultation at 1031 National Services, please call 888-872-1031 or contact us online today.