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Relation Complication: 1031s with Related Parties

One question that often arises in our conversations about 1031 exchanges is if related parties can play a role. Often, exchangers want to know if they can sell to or buy a property from a family member, related entity, or trust that they control and still have a valid exchange. In a standard 1031, the taxpayer sells a “relinquished” property and then buys a “replacement” property to complete the exchange. Although the taxpayer can sell their relinquished property to anyone, there are rules that restrict them from buying the replacement property from a related party .


Question Corner

Question- Can I use a new LLC to buy my replacement party?

  
Yes, as long as the only member of the LLC is the exchanger. Investors can sell property in their personal name and then set up a new single-member LLC (SMLLC) that can be used to acquire the replacement property. When established correctly, an SMLLC is treated as a “disregarded” entity in that all the tax reporting goes directly into the taxpayer’s personal tax return as the sole member; most often, the tax ID number is the exchanger’s social security number. Consequently, the phrase denoting this entity as a “tax nothing, but legal something” is a good description.
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Ron Raitz, CCIM - President

Building ADE with a foundation of educating others on 1031 exchanges, Ron offers continuing education courses for professions which include CPAs, attorneys, realtors, and investor groups. He is also a lecturer in academia at GSU, Mercer Law, Georgia Tech and Emory's graduate real estate programs.