Same Taxpayer Requirements in a 1031 Exchange

By: Shannon Kinnard

Understanding the same taxpayer rule is an important part of the 1031 exchange process. In order to qualify for 1031 exchange treatment under IRS guidelines, the taxpayer that sells the relinquished property must also purchase the replacement property. This rule applies to any taxpayer, whether an individual, trust, partnership, LLC or corporation. The simplest example is if the relinquished property is held by an individual, Jordan Smith, he would take title to the replacement property as Jordan Smith.

However, there is an exception to this rule: the use of a disregarded entity for tax purposes. A disregarded entity is a business entity that has a single owner and has not elected to be taxed as a separate entity for federal tax purposes. Common types of disregarded entities include: (i) Single-member Limited Liability Companies, (ii) Revocable Living Trusts, (iii) Delaware Statutory Trusts, and (iv) Illinois-type Land Trusts.

Below are some examples in practice:

Example 1: Jordan Smith sells a property under his individual name, and forms ABC LLC, a single-member limited liability company, to acquire the replacement property. Provided Jordan Smith is the sole owner of ABC LLC, this complies with the same taxpayer requirement as any income, expenses and/or losses would be reported on his individual tax return.

Example 2: ABC LLC, a single-member limited liability company, which is owned by Jordan Smith, sells a property and he forms DEF LLC, a single-member limited liability company, also owned solely by Jordan Smith, to acquire the replacement property. Since Jordan Smith is the sole owner of each disregarded LLC, this complies with the same taxpayer requirement.

There are some other exceptions and scenarios that can make the same taxpayer rule more complicated, such as with corporate reorganization, partnership conversion, married couples, or even the death of the taxpayer during the exchange period, in which the taxpayer’s estate or trustee may complete the exchange.

The 1031 exchange process can be complex, but strategic planning with your tax advisor and our team of experts at Genesis Bank Exchange can help maximize the potential of your investments. If you’re interested in learning more about the 1031 exchange process and how it may benefit you, connect with the Genesis Bank Exchange team by calling 800.797.1031, or explore further details on our website: https://www.mygenesisbank.com/1031Exchange.

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