Can an LLC do a 1031 exchange?

Classification, not the name on the deed, names the exchanging taxpayer

Start with how the LLC is taxed. Reg. §301.7701-3(b)(1) sets the defaults for a domestic eligible entity that has made no election: "a partnership if it has two or more members" and "disregarded as an entity separate from its owner if it has a single owner."

Everything else follows from that one line. A disregarded LLC has no separate existence for federal income tax, so its owner reports the sale, files Form 8824 and is the person the same-taxpayer requirement is testing. A partnership files its own return and is the person doing the exchange.

An LLC that elected corporate or S-corporation treatment is a third case: the corporation is the taxpayer, it must both relinquish and acquire, and its shareholders cannot exchange stock. 1031 exchanges for property in S-corps and C-corps works through that structure.

A one-member LLC is invisible, so you may cross between it and yourself

Because the entity is disregarded, the deed on the sale and the deed on the purchase do not have to read identically. You can sell property titled in your LLC and take the replacement in your own name, sell personally and take the deed in a brand-new LLC you alone own, or move between two of your own single-member LLCs.

The chain can be more than one link deep. A single-member LLC whose sole member is another single-member LLC you own is still disregarded up to you, which is how lenders get the special-purpose borrower they ask for without disturbing the exchange.

Tell the intermediary and the title company the exact vesting before documents are drafted, not at the signing table. Can I 1031 from my personal name into an LLC covers the mechanics on the purchase side.

With two members the entity is the exchanger, because a membership interest is not real estate

Reg. §1.1031(a)-3(a)(5)(iii) lists what can never be real property for §1031 regardless of state law, and "interests in a partnership" are on it alongside stock, bonds, notes, other securities and certificates of trust or beneficial interest.

So a member cannot cash out by exchanging an LLC interest, and the LLC cannot hand a member their share of the proceeds to reinvest alone. The partnership sells, the partnership buys, and every member stays in the same partnership.

The one exception is a partnership that has made a valid election under §761(a) to be excluded from subchapter K: §1031(e) then treats the interest "as an interest in each of the assets of such partnership and not as an interest in a partnership." Where members want different outcomes, the usual routes are drop-and-swap and swap-and-drop and when only one partner wants cash.

A husband-and-wife LLC splits on state law, and Rev. Proc. 2002-69 lets the couple choose

Outside community property law, a two-spouse LLC has two members and is a partnership by default. Inside it, Rev. Proc. 2002-69 gives the couple an election in substance: the entity must be "wholly owned by a husband and wife as community property," no one else can be an owner, and it must not be treated as a corporation.

Meet those conditions and the Service "will accept the position that the entity is a disregarded entity" if the couple report it that way, or that it is a partnership if they file partnership returns. The choice has to be consistent, because section 4.03 treats a change in reporting position as a conversion of the entity.

Nine states apply community property law to marital assets — Louisiana, Texas, New Mexico, Arizona, California, Nevada, Washington, Idaho and Wisconsin — and the revenue procedure also reaches a foreign country or a US possession. Adding or removing a spouse on title picks up from there.

Admitting a member turns a disregarded LLC into a partnership the same day

Rev. Rul. 99-5 spells out what happens. Where a new member buys half of the existing owner's interest, that purchase "is treated as the purchase of a 50% interest in each of the LLC's assets, which are treated as held directly by A," and immediately afterwards both are treated as contributing their interests to a partnership under §721.

In the ruling's Situation 1 the incoming member pays $5,000 for half the interest, the original owner recognises gain or loss on a deemed sale of a half interest in each asset, and the new member's basis in the partnership interest is the $5,000 paid. In Situation 2 the new member instead contributes $10,000 to the LLC and no deemed sale occurs.

During an exchange this matters twice. A member added before the replacement closing changes the buying taxpayer, and a member added shortly afterwards invites the question whether you acquired the property to hold for investment. Moving the replacement into an LLC or trust after closing covers the timing.

Worked hypothetical: a one-member LLC sells at $900,000 and the member buys personally

Round hypothetical numbers. A hypothetical LLC whose only member is you sells a warehouse for $900,000, retires a $310,000 loan, absorbs $38,000 of costs and sends $552,000 to the intermediary.

You buy a replacement for $950,000 in your own name with a $350,000 loan. The same-taxpayer requirement is satisfied because the LLC was never a taxpayer: you sold and you bought, and Form 8824 is filed with your return under your own taxpayer identification number.

Change one fact. Bring your brother in as a 20% member a month before the sale and the LLC becomes a partnership under Rev. Rul. 99-5. The partnership is now the seller, it must acquire the replacement itself, and neither of you can take a personal deed.

What to hand the intermediary before anything is drafted

Give the exchange file the documents that prove classification rather than a description of it. The distinction that matters is whether a return has ever been filed for the entity, not whether it has an EIN.

Have your CPA or attorney confirm the classification and any election history while the property is still listed, because a mistaken assumption here cannot be repaired once the deeds record.

• The articles or certificate of formation and the current operating agreement, including any amendment admitting a member
• A statement of whether the LLC has ever filed Form 1065 or made a Form 8832 or Form 2553 election
• The taxpayer identification number the exchange will be reported under: the member's for a disregarded entity, the LLC's for a partnership
• Exact vesting for the replacement deed, including any new entity to be formed and the state of formation
• For a spousal LLC, the state whose community property law applies and how the entity has been reported