Disregarded Entity

Three ownership structures can be disregarded, each on a different authority.

Not every one-owner arrangement rests on the same rule, and not every two-owner arrangement is a partnership:

• Single-member LLC: Reg. section 301.7701-3(b)(1)(ii) makes a domestic eligible entity with a single owner disregarded unless it elects otherwise; with two or more members the default is partnership.
• Spouses in a community property state: under Rev. Proc. 2002-69 the IRS accepts either disregarded or partnership treatment for an entity owned solely by spouses as community property, and a change in position is treated as a conversion.
• Spouses running an unincorporated business: a qualified joint venture under section 761(f) is not treated as a partnership if both spouses materially participate, file jointly and elect, but the IRS explains that a business held through an LLC does not qualify.
• Grantor trusts are a parallel case: a revocable trust's grantor is treated as its owner under section 676, and Rev. Rul. 2004-86 treats DST investors as owning the real estate directly.

A worked example shows the same taxpayer selling in one name and buying in another.

Hypothetical: you own a rental in your own name and sell it for $1,000,000. For liability reasons you take title to the $1,100,000 replacement through a new LLC with you as its only member. Because the LLC is disregarded, its purchase is treated as yours, and the exchange runs from you to you. The same holds in reverse, as covered in moving from your personal name into an LLC.

Now change one fact: before closing, you make your spouse a 50% member, and you live in a state without community property. The LLC defaults to partnership status, so the buyer of the replacement is no longer the taxpayer who sold. Illustrative figures, rounded; have your CPA model your real basis and income. See adding a spouse to title on the replacement before making that change.

It bites when membership changes mid-exchange or a state rule looks past the entity.

Adding a member, electing corporate status or merging the LLC during the exchange period can turn the buyer into a different taxpayer. The same-taxpayer rule guide walks through the fixes, and whether an LLC can do a 1031 exchange covers multi-member LLCs.

Disregarded status also shapes reporting. The Form 8824 instructions list an exchange made by a disregarded entity that you or a related party owned among exchanges made indirectly with a related party, and California's FTB 3840 is filed by the owner of a disregarded entity, not by the entity.