The title company wants to change the vesting at closing. Is that safe for my exchange?

The vesting change is safe only if the taxpayer does not change

Section 1031(a)(1) defers gain when real property held for investment is exchanged for like-kind real property to be held for investment. The regulations under Reg. section 1.1031(k)-1 speak throughout of the taxpayer who transfers the relinquished property and receives the replacement. That is the anchor: the person who sold has to be the person who buys.

The name on the deed matters only as evidence of who that is. Some entities are invisible for income tax purposes, and moving between them changes the paperwork but not the taxpayer. Others are separate taxpayers, and vesting in them hands your exchange to someone else. The same-taxpayer rule is the full treatment.

Title companies and lenders ask for vesting changes for their own reasons: underwriting rules, a preferred borrower entity, or a guess at what the buyer wants. None of those reasons is a tax analysis, and the closing agent is not responsible for your exchange. That responsibility sits with you and your advisers.

Changes that keep the same taxpayer

Three common requests stay inside the rule, provided each entity really is what it appears to be.

• Your revocable living trust instead of your own name: you are treated as owner under section 676. See selling in your name and buying in your trust.
• A single-member LLC you own, often requested by a lender: disregarded under Reg. section 301.7701-3(b)(1)(ii) unless it has elected otherwise.
• A single-member LLC owned by your revocable trust: two disregarded links, both looked through to you; see the trust and LLC chain.
• Your own name when the seller was your disregarded LLC: covered in LLC sells, buy in your personal name.

Changes to refuse at the closing table

These all put a different taxpayer on title, in whole or in part. A two-member LLC is a partnership by default under the same regulation, and an interest in a partnership is not real property under Reg. section 1.1031(a)-3(a)(5). A corporation, including an LLC taxed as one, is its own taxpayer.

Adding a spouse or child as co-owner means part of the replacement belongs to someone who did not sell. Married couples outside community property states cannot cure that by vesting in a jointly owned LLC; Rev. Proc. 2002-69 is limited to community property. Adding a spouse after closing is a separate decision.

• Spouse, child, partner or friend added as co-buyer.
• An LLC with two or more members, unless community property relief applies.
• An LLC that elected corporate or S corporation status, or any corporation.
• A different trust that is not a grantor trust of the seller.

A worked example of a lender-driven change

Hypothetical: you sold a rental in your own name for $800,000. Two days before the $950,000 replacement closes, the lender's documents arrive with the borrower shown as a new LLC owned by you and your adult son, because the lender wants a co-guarantor.

Vesting there would put half the replacement in a partnership that did not sell anything. The fixes are to have the LLC owned by you alone, with your son guaranteeing the loan without an ownership interest if the lender accepts that, or to close in your own name and revisit ownership later with advice. Run your own numbers with your CPA.

How to handle a vesting change in the last week

Most problems come from late changes nobody routed to the intermediary. Treat any new name as a stop sign until the intermediary confirms it in writing.

• Send the new vesting to the qualified intermediary before signing loan or closing documents.
• Ask for the formation and ownership documents of any new entity, and confirm it has made no election.
• Make sure the purchase contract assignment, the deed and the settlement statement all show the same buyer.
• If the lender insists on a structure that changes the taxpayer, keep the original vesting and look for other financing, or fill the debt gap with added cash, while there is still time inside the 180 days.
• Have your CPA or attorney confirm the final vesting against the relinquished property's title.