In a recent blog, we discussed the benefits of a 1031 Exchange (or like-kind exchange) that allow property owners to sell one property to then, in turn, acquire another property that will serve the same purpose. The property owner(s) can avoid the recognition of the gain or loss on the price of the original property (dodging heavy capital gains taxes).
Our initial discussion on this subject focused on individuals taking advantage of 1031 Exchanges, but what about Limited Liability Companies (LLC) as owners of real estate? The short answer to the question posed in the subject line above is yes, LLCs can execute 1031 Exchanges to avoid capital gains taxes through like-kind exchanges. However, there are some situations where the answer becomes more complicated or is a flat-out no.
Single-Member LLCs & LLCs Controlled By Married Couples
Single-member LLCs have the capability and permission to execute 1031 Exchanges. The same can be said for LLCs owned solely in the name of married couples as long as the couple lives in a community property state (California included), although this depends on how the LLC is taxed.
These LLCs will have no issue executing the exchange as long as it is conducted according to Section 1031 of the Internal Revenue Code. This practice is separate from a previous capital gains tax avoidance measure we discussed for LLCs.
Multi-Member LLCs & Partnerships
The answer becomes more complicated when considering multi-member LLCs and partnerships. If one partner of a partnership or an individual member of a multi-member LLC is looking to exchange a piece of personal property then this would not qualify. Each member of the partnership would need to have an interest in the piece of property and commit to selling off their interests as a group in order to acquire a like-kind asset as a group.
The same can be said for partners who wish to sell their interest in the partnership in order to acquire a similar interest in another partnership. This would not qualify as a like-kind exchange. However, an entire partnership can do a 1031 Exchange if each member sells or relinquishes their interest in the partnership and, as a group, purchases a like-kind entity, keeping the entire partnership intact.
Contact the Law Offices of Tyler Q. Dahl to Execute These Exchanges
1031 Exchanges are complicated, especially for multi-member LLCs and partnerships. Whether you are an individual, operate a single-member LLC, or are part of a partnership then it’s important to work with a law firm that has experience executing 1031 Exchanges from beginning to end.
At the Law Offices of Tyler Q. Dahl, we have extensive expertise in tax strategy and business law and can help you navigate the complexities of a like-kind exchange, helping you avoid heavy capital gains taxes. Contact our team for assistance in avoiding unnecessary taxes that slow down progress and put you in a financial bind.
Additionally, you can learn more about how to use an LLC to Dodge Costly Proposition 19 Tax Reassessment in California
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