Does a direct title security qualify as like-kind property?

The LLC disappears for tax purposes, so the deed is treated as yours

Entity classification decides this question before section 1031 does. Under Reg. section 301.7701-3(b)(1)(ii), a domestic eligible entity with a single owner is "disregarded as an entity separate from its owner" unless it elects to be taxed as a corporation. Reg. section 301.7701-2(a) then says what that means: the entity's activities "are treated in the same manner as a sole proprietorship, branch, or division of the owner."

So when your LLC takes title, the federal tax system sees you taking title. The exchange is between you and the property, and the LLC is a state-law liability wrapper that changes nothing on your return.

The direct title securities we place work exactly that way: you own the property through a single-member LLC, each offering is tied to a specific property with a physical address, title ownership and a registered CUSIP number, and you receive a private placement memorandum, a customized supplement and a subscription agreement. The paperwork looks like a securities purchase; the tax result follows what the LLC owns.

Fee title to a house and its land is real property under the 2020 regulation

Since 2018 section 1031 applies only to real property. Reg. section 1.1031(a)-3(a)(1) defines it as "land and improvements to land," and paragraph (a)(2)(ii)(B) lists houses and apartments among the buildings that count. Paragraph (a)(5)(i) names "fee ownership" first among the intangible interests in real property that qualify.

The like-kind test itself is broad. Section 1031(a)(1) requires real property held for productive use in a trade or business or for investment to be exchanged for real property of like kind to be held the same way, so a net-leased single-family rental can replace an apartment building, a strip center or raw land.

That makes the single-family rentals in our direct title offerings ordinary like-kind replacement property, provided you hold them for investment and meet the identification and closing deadlines.

DST interests and REIT shares reach different answers for different reasons

The same regulation lists interests that are not real property "regardless of the classification of such property under State or local law": stock, other securities, interests in a partnership, and "certificates of trust or beneficial interests." A REIT share is stock, so it fails. An LLC or limited partnership unit in a fund is a partnership interest, so it fails too; see exchanging into a syndication or fund interest.

A traditional DST interest is a beneficial interest, yet it qualifies because of Rev. Rul. 2004-86. The ruling treats each investor as a grantor who is "considered to own an undivided fractional interest in Blackacre," so the exchange is for real property and "not the exchange of real property for a certificate of trust or beneficial interest." That look-through holds only while the trustee stays inside the ruling's limits, which our page on DST like-kind qualification explains.

A direct title security needs no ruling to get there. You are not a beneficiary of a trust or a partner in a fund; you are, for tax purposes, the owner of record.

Three facts can turn the LLC into something that is not like-kind

The disregarded status is a default, not a guarantee. Under Reg. section 301.7701-3(f)(2), a single-member entity "is classified as a partnership when the entity has more than one member," and a partnership interest is not real property for section 1031. An election to be taxed as an association turns the LLC into a corporation, and its membership interests into stock.

Married owners need care. In a community property state, Rev. Proc. 2002-69 lets a husband and wife who own an entity as community property treat it as disregarded, and the IRS "will accept the position." Outside those states, an LLC owned by two spouses is a two-member entity and defaults to partnership treatment.

The taxpayer must also match. The person who sold the relinquished property should be the sole member of the LLC that takes the replacement, a point worked through in moving from personal name into an LLC.

• Confirm the LLC has one member, and that the member is the same taxpayer who sold.
• Confirm no Form 8832 election to be taxed as a corporation has been filed for the LLC.
• If spouses will own it together, confirm community property status with your CPA before closing.
• Identify the property by address in your 45-day notice, as you would any other replacement.

Hypothetical: a $400,000 rental house replaced by direct title in your own LLC

Round numbers, hypothetical. You sell a rental condo for $400,000 with no mortgage, and the full $400,000 goes to your qualified intermediary. On day 20 you identify a net-leased single-family rental priced at $400,000, offered as a direct title security, and it closes on day 60 into a newly formed LLC of which you are the only member.

For federal tax you exchanged fee title to a condo for fee title to a house. Your gain is deferred, your old basis carries over under section 1031(d), and you report the exchange on Form 8824 in your own name with no partnership return for the LLC.

Now change one fact: your adult child joins the LLC as a 10% member at closing. The LLC is a partnership from day one, you received a partnership interest, and the exchange fails for the whole $400,000. Run your own facts past your CPA before anyone else signs the operating agreement.