Same Taxpayer Requirements in 1031 Exchanges

IRC 1031 requires that the same taxpayer who relinquishes property must acquire the replacement property. This requirement is in place to maintain a continuity of tax. But, this requirement does not mean that the same name that held title on the relinquished property must be the name on the replacement property.

For simplicity, if John Doe were to sell property, it would be best for John Doe to take title to the replacement property. And if ABC LLC were to be the seller, then ABC LLC should be the purchaser of the replacement property.

When the above is not possible, it is important to understand that the requirement for 1031 is that the same taxpayer who relinquished property must acquire the replacement property. This can be done under different names and still maintain the same taxpayer requirement. If a taxpayer sells under their individual name, they could purchase the replacement property under:

Their individual name
As a trustee of a Revocable Living Trust
Under a single-member limited liability company (LLC) treated as a disregarded entity
As a Tenant-in-Common owner of property
As a member of a Delaware Statutory Trust (DST).

This will also qualify if an entity is selling property, yet it wishes to create a new entity for the acquisition of replacement property. The taxpayer can work with their tax professional in creating a new LLC, which is disregarded for tax purposes. The entity that sold property in the exchange would be the sole member of this new LLC. When structured properly, this will meet the requirements set forth in the tax code.

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Basics of a 1031 Exchange

To structure a 1031 Exchange property under I.R.C. Section 1031, there are some basic requirements that a taxpayer must meet.

Closing Costs

There are always questions from taxpayers as to which closing costs can be paid with sales proceeds when doing a 1031 Exchange. This article provides some overall guidance on the topic.

1031 Disclosure

The IRS requires that if any party to a transaction wishes to do a 1031 Exchange, all parties to the closing are made aware. The best place to do this is in the purchase and sale agreement.

Identification Rules

Section 1031 requires that a taxpayer doing an exchange identify their replacement property while following certain rules.