FAQs on the Same Taxpayer Requirement in a 1031 Exchange

The Same Taxpayer Requirement is simple in practice when you are dealing with individuals, i.e. John Smith holds title to the Relinquished Property and therefore John Smith must hold title to the acquired Replacement Property as John Smith. The “Same Taxpayer” requirement is less obvious when different types of entities are involved in the 1031 Exchange, such as multi-member LLCs, S-Corps, etc.

Below are answers to some commonly asked questions regarding the “Same Taxpayer” requirement.

Q: For a husband and wife owned property, if they own property as Tenants-in-Common (TIC) can they take title to the replacement property in just one of their names?

A: Not unless the spouses live in a community property state where title in just one would still be considered owned by both. In all other situations they should take title in both names.

Q: If a husband sells an investment property under his name, can he put the title of the Replacement Property in both his and his wife's name?

A: This is not advisable since it does not meet the Same Taxpayer requirement. However, in a few years when the exchange is “old and cold” it would be acceptable to add the spouse. Q: If 123 Main LLC sells Relinquished Property through a 1031 exchange and 123 Main LLC buys the Replacement Property, but 2 years later they quitclaim it to 456 New LLC (same members) - is there a problem with IRS? A: Two separate LLCs, even with the same members, are not considered the Same Taxpayer. But generally, changes in the ownership structure are possible after a period of two years or more. This is not codified but rather the general belief of commentators.

Q: If the single member LLC has filed an election at their outset to be taxed as an S-Corp, does that S-Corp election defeat the disregarded entity flexibility so that the owner of the LLC now cannot acquire the Replacement Property in their individual name? Meaning, does that disregarded entity that elected to be taxed as an S-Corp now HAVE to acquire the Replacement Property in the name of their LLC instead of their individual name?

A: Yes, as to the first question. Generally, holding real estate investments in corporations, including S-Corps, can cause unexpected issues when trying to change the entity and are not considered the best way to hold real estate. An LLC does not cause any such issues. As to the second question, yes. Keep in mind that S-Corp is not disregarded, rather its tax reporting can be done on the shareholder’s personal return. So, any replacement property would have to be owned by S-Corp, either directly or as the single member of a new LLC.

Q: Can a single member LLC sell the Relinquished Property and a different single member LLC acquire Replacement Property if the member is the same on both LLCs?

A: That is a good question and one that comes up constantly. The answer is yes, since the single member LLCs are tax disregarded, you would look at the member to determine if the Same Taxpayer requirement is met. This is very common when a taxpayer is selling a property held by one LLC but would prefer eliminating potential claims and matters that would remain should the replacement property be put back into the original LLC. A fresh LLC would prevent that.

Q: Can a Same Taxpayer add a third party to the acquired Replacement Property, as long as all of the Relinquished Property proceeds end up being used?

A: Yes and no, it depends upon the structure. If the taxpayer alone owns the relinquished property, a new two person partnership or LLC would not result in maintaining the same taxpayer. However, if the two parties held the ownership as tenants in common, that would be fine. Keep in mind that a tenancy in common in an exchange context should consider a TIC Agreement per Rev. Proc. 2002-22. Also remember that the Same Taxpayer must exchange equal or up in equity and value, so the price of this new property would need to be substantially higher.

Q: What other different title holding options would continue to constitute the same taxpayer to a person holding title individually?

A: Any tax disregarded entity. This would include such things as a new single member LLC, Revocable Living Trust, Illinois Land Trust, Tenant-in-Common, or as a beneficiary of a Delaware Statutory Trust (DST).

Read our additional blog, The Same Taxpayer Requirement in a 1031 Exchange, for a more detailed explanation on the requirements and for specific examples of way to hold title, etc.