1031 Exchange LLC Structuring

The Same Taxpayer Rule

The IRS requires that the same taxpayer who sells the relinquished property must acquire the replacement property. This 'same taxpayer' rule creates complications when properties are held in LLCs, partnerships, or other entities.

• The entity that sells must be the entity that buys
• You cannot exchange individually and take title through an LLC
• Partnership interests cannot be exchanged for real property
• Disregarded single-member LLCs are treated as the individual owner

Single-Member vs. Multi-Member LLCs

A single-member LLC that is treated as a disregarded entity for tax purposes is treated as the same taxpayer as its owner. Multi-member LLCs (taxed as partnerships) present more complex issues, as the partnership itself — not the individual partners — is the taxpayer.

Drop and Swap vs. Swap and Drop

When partners want to go their separate ways after an exchange, two common strategies are the 'drop and swap' (distributing property to partners before the exchange) and the 'swap and drop' (completing the exchange first, then distributing). Each has different tax implications and holding period requirements.