Atlanta Deferred Exchange
The ADE Difference


Atlanta Deferred Exchange

In a 1031 exchange, do I have to buy my replacement property in the same name that I sold my relinquished property?

Q: As part of a planned 1031 exchange, I have a NNN property under contract and am applying for a loan.  I hold title to my relinquished property in my name, but my lender wants me to set up an LLC to take title to my new property.  Can I still do a 1031?

A: In order to complete a proper 1031 exchange, the taxpayer who is the seller of the relinquished property must also purchase the replacement property. Put another way, title to the replacement property should be taken the same way title of the relinquished property was held. Adhering to this rule is very important so as not to invalidate your exchange.However, there is one exception to this general rule for "disregarded entities" which are completely ignored for tax purposes. Examples include revocable trusts and single member limited liability companies. If you establish a limited liability company (LLC) in which you are the sole member (i.e., owner), it is considered a disregarded entity and is ignored for tax purposes. For your 1031 exchange, you will be considered the "same taxpayer" as the single member limited liability company.

Lenders often require that the borrower be a single-asset bankruptcy remote entity- such as a single member LLC.  This is so that the borrower's other assets do not adversely affect the property pledged as collateral for the loan. It also provides a protective shield for the lender in the event of personal bankruptcy. Using a disregarded entity to do that will satisfy the lender while complying with the 1031 tax rules.