Types of Ownership Structures in a 1031 Exchange Explained

two people going over list at a desk

When it comes to having a 1031 exchange explained, you first have to understand the litany of rules that real estate investors must follow to complete a successful exchange. One of the most critical factors is how the relinquished property was owned. This detail can affect what investors can and cannot do when selling their property since the IRS requires that the exchanger be the same taxpayer.

8 Variations of Ownership in a 1031 Exchange Explained

Let’s go over the different ownership structures that investors may have or consider when owning real property and what to expect when they conduct a 1031 exchange. For these examples, we will talk about how “Bob, Sally, and Sue” can conduct 1031 exchanges under different ownership structures.

  1. Individual Ownership

    This is the most straightforward type of ownership since only one individual owns the property. For example, if Bob sold his property, then Bob would be the individual that owns the replacement property.

  2. Joint Ownership

    Let’s say that Bob is married to Sue. Bob and Sue sell their rental property and now want to do a 1031 exchange. Since both Bob and Sue were on the title of the relinquished property, they both would need to purchase the replacement property.

  3. Joint Ownership with Tenants in Common

    Sally, Bob, and Sue all own the same property through a tenant-in-common structure. If they sold a property for $900,000, Sally, Bob, and Sue could conduct a 1031 exchange on their respective $300,000 with the ability to go their separate ways. Since they are each reporting their respective share on their personal tax returns, each owner in this scenario could have an independent decision on their exchange.

  4. Single Member LLC

    This entity is also known as a “disregarded” entity. Real estate investors often put their properties in an LLC to protect themselves for liability purposes, but the LLC does not exist for tax purposes. If Sally had a single-member LLC that sold a property, she could conduct a 1031 exchange under that same disregarded entity or under her name since the taxpayer is not changing.

  5. Multi-Member LLC or Partnerships

    Bob, Sally, and Sue own an LLC that owns an investment property. They all agree to sell the property, but Sue wants to have her proceeds paid out to her, while Bob and Sally want to conduct a 1031 exchange. Since the LLC owned the relinquished property, the LLC would have to be the taxpayer that is conducting the 1031 exchange.If any of the owners were to take their proceeds out of the 1031 exchange, it could result in taxes being owed by all three owners. Of course, the investors can conduct a “drop & swap” on the LLC where they would drop out of the LLC into tenant-in-common ownership, and each conducts their exchange, but this is a complex process that should be done well in advance of their 1031 exchange.

  6. S-Corps & C-Corps

    Unfortunately, there is not much creativity under the structure of the S-Corp or C-Corp. If you own real property in an S- or C-Corp, then that entity must conduct a 1031 exchange. Any proceeds taken off the table to accommodate an owner that does not wish to proceed with a 1031 exchange can result in tax consequences to everyone under the entity.

  7. Revocable or Living Trust

    This trust structure is another “look through” entity, meaning that the grantor still maintains control over the property. Since the trust looks through to the grantor, the grantor is the “taxpayer”. So, if Sally had a living trust that sold a relinquished property, she could conduct an exchange under her individual name.

  8. Irrevocable Trusts

    These trusts own the assets directly, and typically have their own tax identification number. Therefore, the trust must be the one executing the 1031 exchange. So, if Sue had put an investment property inside an irrevocable trust to remove the asset from her estate, the trust itself would still be eligible to conduct a 1031 exchange.

Don’t Let the Amount Overwhelm You

As you can see, there are different options and considerations for the vast amount of ownership structures investors can consider when owning investment properties. Hopefully, having these elements of a 1031 exchange explained in detail helps clarify what is involved with the process.

Some of these structures require advanced planning, depending on the direction the owners want to take when the relinquished property is sold. Therefore, we recommend always working with well-versed tax and legal counsel in these areas so you can proactively approach your 1031 exchange!

RVPII Consulting can help determine the best option for you and your financial goals.

Request a consultation today!


Leave a Reply

Your email address will not be published.

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed

Previous Post
5 Ways a DST Can Help Real Estate Investors During a Bad Market
Next Post
1031 Exchange Rules to Follow for A Successful Transaction