Single Member LLC’S

Any natural or legal person (individual, corporation, partnership, LLC, trust, etc.) may elect to complete a 1031 exchange on the sale of property held for investment or property utilized in a trade or business.   The general rule is that an Investor must acquire title to the Replacement Property in the same natural or legal person that sold the Relinquished Property (generally as determined by the status of legal title).  For example, if John Doe is the seller of the Relinquished Property, the Joe Doe must acquire the Replacement Property.  Also, if ABC Corporation sells the Relinquished Property, then ABC Corporation must acquire the Replacement Property.

EXCEPTION TO RULE / DISREGARDED ENTITIES

An exception to the general rule above is that if the transferor of the Relinquished Property or the transferee of then Replacement Property is a “disregarded entity” or the “owner” of a disregarded entity, then the entity is treated as if it does not exist and the owner and the entity are, in effect, interchangeable.

LIMITED LIABILITY COMPANIES (LLCs)

Limited liability companies (“LLC”) may be considered as a disregarded entity in the following cases where the LLC has not made an election to be treated for tax purposes as a corporation:

  • 100% of the interests are owned by a single legal or natural person.
  • 100% of the interests are owned by husband and wife as community property in a community property state.

Additionally, the IRS has ruled that a two-member LLC formed under Delaware law was disregarded for §1031 exchange purposes where all economic interests were held by one member and the function of the second member was solely to prevent a bankruptcy filing or other violation of the LLC’s covenants with lenders.  The IRS has also ruled that the acquisition of all the ownership interests held by 2 different owners by a single buyer in a single transaction constituted an acquisition of the underlying assets owned by the LLC.
Use of disregarded entities provides flexibility in exchange planning.  For example, an individual who sells a Relinquished Property in his or her individual name may acquire the Replacement Property in a single member limited liability company.  This provides additional liability protection for the Investor.