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Tax Day 2025: Key Deadlines and Considerations for Reporting 1031 Exchanges

01/29/25

With Tax Day 2025 on the horizon, it's time to start preparing your documents for your 2024 Tax Return. For those who ...

Authored by: meredithb@accruit.com

Authored on: Wed, 01/29/2025 - 14:57

1031 Exchange General

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{44}" paraid="876518903">As Tax Day approaches, individuals and businesses are gearing up to file their tax returns. If you completed or started a 1031 Exchange in 2024, it's important to be aware of the specific reporting requirements for your return. In this blog, we cover key tax deadlines and provide guidance on how to properly report a 1031 Exchange for the 2024 tax year. </p>

<h2 aria-level="2" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{50}" paraid="924466444" role="heading">Reporting Deadlines for Different Entities in 2025 </h2>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{56}" paraid="77906091">The due dates for 2024 tax returns, based on the type of entity and form being filed, generally follow these timelines: </p>

<h4 aria-level="3" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{62}" paraid="1710109720" role="heading">Individuals </h4>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="4" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{68}" paraid="2119262552">Standard Filing Deadline: Most individuals living and working in the U.S. must file their 2024 tax returns (Form 1040 or 1040-SR) and pay any taxes due by April 15, 2025. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="4" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{76}" paraid="1190934013">Extended Filing Deadline and Extension: If you elect to file for an extension, you must submit it no later than April 15, 2025, which will allow you until October 15, 2025, to file your 2024 tax return. To obtain an automatic six-month extension, file Form 4868 and pay an estimated amount to avoid penalties and interest. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="4" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{84}" paraid="1077117269">Maine and Massachusetts Residents: Due to local holidays, individuals in these states must file their 2024 tax returns by April 17, 2025. </p>
</li>
</ul>

<h4 aria-level="3" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{98}" paraid="318077827" role="heading">Farmers and Ranchers </h4>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="5" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{104}" paraid="1854938640">Standard Filing Deadline: Farmers and ranchers who didn’t make an estimated tax payment by January 15, 2025, must file their 2024 tax returns (Form 1040 or 1040-SR, Schedule F) by March 3, 2025. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="5" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{112}" paraid="2144642718">Extended Filing Deadline and Extension: If an estimated tax payment was made by January 15, 2025, the filing deadline aligns with the standard tax deadline of April 15, 2025. To obtain an automatic six-month extension, file Form 4868 and pay any estimated taxes due. The extended deadline is October 15, 2025. </p>
</li>
</ul>

<h4 aria-level="3" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{122}" paraid="1325978459" role="heading">Corporations </h4>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="6" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{128}" paraid="2126972204">Standard Filing Deadline: Corporations must file their 2024 calendar year income tax return (Form 1120) and pay any taxes due by April 15, 2025. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="6" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{136}" paraid="1005219411">Extended Filing Deadline: File Form 7004 and make an estimated tax payment by April 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is October 15, 2025. </p>
</li>
</ul>

<h4 aria-level="3" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{146}" paraid="2143783646" role="heading">Partnerships and S Corporations </h4>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="7" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{152}" paraid="623339783">Standard Filing Deadline: Partnerships and S corporations must file their 2024 tax returns (Form 1065 or Form 1120-S) and provide each partner or shareholder with their Schedule K-1 (or Schedule K-3, if applicable) by March 15, 2025. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="7" role="listitem">
<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{160}" paraid="1158122031">Extended Filing Deadline: File Form 7004 and make an estimated tax payment by March 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is September 15, 2025. </p>
</li>
</ul>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{170}" paraid="453105071">Any entity reporting a 1031 Exchange conducted in the 2024 tax year must report the exchange to the IRS by filing Form 8824 with their income tax return by the applicable deadline. </p>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{178}" paraid="523073924">For a complete list of 2025 tax deadlines, visit the <a href="https://www.irs.gov/" rel="noreferrer noopener" target="_blank">IRS website</a>. </p>

<h2 aria-level="2" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{189}" paraid="1154335370" role="heading">Tax Reporting Guidelines for Various Property Types  </h2>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{201}" paraid="429112644">For the sale of raw land, gains or losses must be reported on Form 8949, with the results transferred to Schedule D. If the property has been owned for less than a year, the sale is reported as a short-term gain or loss, while ownership of a year or more qualifies it as a long-term gain or loss. When calculating the adjusted basis, it is important to track the purchase price, associated costs, and any improvements made on the property. Although raw land itself cannot be depreciated, certain improvements to the land may qualify for depreciation and must be tracked separately for accurate reporting. Additionally, if the raw land is held as investment property, it is not subject to the $10,000 SALT (State and Local Tax) cap on property tax deductions imposed by the Tax Cuts and Jobs Act of 2017. If the land is part of a 1031 Exchange, Form 8824 must also be filed. </p>

<h4 aria-level="3" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{207}" paraid="1674586431" role="heading">Business Use Property </h4>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{213}" paraid="1406176730">For business use property, income generated from the property is reported on Schedule C for actively managed business property, or Schedule E for passive or rental property. Deductions for operating expenses, depreciation, property taxes, and business loan interest can be claimed to offset income generated by the property. When selling business property, the transaction should be reported on Form 8949, with the results transferred to Schedule D for capital gains or losses. Depreciation recapture is required for the depreciated portion of the property and must be reported on Form 4797. If the sale involves a 1031 Exchange, Form 8824 must also be filed. </p>

<h4 aria-level="3" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{219}" paraid="1413048837" role="heading">Rental Property </h4>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{225}" paraid="15177654">For rental property, income is reported on Schedule E, allowing deductions for expenses such as mortgage interest, property taxes, repairs, and depreciation. When the rental property is sold, the sale should be reported on Schedule D, and any depreciation previously claimed must be accounted for through depreciation recapture, which is reported on form 4797. If the rental property is part of a 1031 Exchange, the transaction must also be documented on Form 8824. </p>

<h2 aria-level="2" paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{231}" paraid="1602303160" role="heading">Depreciation and How It Affects Your Tax Return </h2>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{237}" paraid="1603512908">Depreciation allows property owners to deduct the cost of wear and tear on income-producing or business-use properties over time, which reduces taxable income during ownership. However, this benefit comes with tax implications upon sale due to<a href="https://www.accruit.com/blog/what-depreciation-recapture-tax"> depreciation recapture</a>, which requires paying taxes on the amount of depreciation previously claimed. </p>

<p paraeid="{54c51cee-5dc7-484b-9650-56cb532825c0}{250}" paraid="278909301">Eligible properties include residential rental properties, which are depreciated over 27.5 years, and commercial properties, which are depreciated over 39 years. Depreciation is calculated by dividing the property’s cost basis (the purchase price minus the land value, as land is not depreciable) by its IRS-defined useful life. </p>

<h3 aria-level="3" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{9}" paraid="1148991984" role="heading">Depreciation Recapture Tax </h3>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{15}" paraid="603346305">When selling a depreciated asset, the IRS requires you to "recapture" the total depreciation claimed during ownership. To calculate depreciation recapture: </p>

<ol role="list" start="1">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Calibri" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{21}" paraid="1593070343">Determine the total depreciation claimed over the ownership period. </p>
</li>
</ol>

<ol role="list" start="2">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Calibri" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{27}" paraid="843920011">Multiply the amount by the federal tax rate of 25%. </p>
</li>
</ol>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{33}" paraid="1312048496">Form 4797 must be used to report the sale of business or income-producing property, detailing the purchase price, date, total depreciation claimed, and the resulting recapture tax. Details from Form 4797 are then included on Schedule D to calculate capital gains or losses. Adjust the sales price by subtracting selling expenses and the adjusted basis (original cost minus total depreciation). </p>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{39}" paraid="380136238">To simplify calculations, utilize our <a href="https://www.accruit.com/depreciation-calculator">Depreciation Calculator</a> to determine your annual allowable depreciation. </p>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{50}" paraid="1707111981"><em>*The calculator is for informational purposes only and provides an approximate estimate. Consult with your Tax Advisor for an accurate calculation based on your specific situation. </em></p>

<h3 aria-level="3" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{56}" paraid="1724548524" role="heading">Depreciation and 1031 Exchanges </h3>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{62}" paraid="1068173871">A 1031 Exchange allows you to defer taxes associated with the real estate transaction, including depreciation recapture tax and <a href="https://www.accruit.com/blog/what-net-investment-income-tax">net investment income tax</a>, when reinvesting proceeds into a like-kind property. The Net Investment Income Tax (NIIT) applies a 3.8% tax on certain investment income, such as capital gains, rental income, and interest. While a 1031 Exchange defers the gain, Exchangers should be aware of how the NIIT may impact their tax reporting. When reporting a 1031 Exchange: </p>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{87}" paraid="1978686629">Include a depreciation schedule on Form 8824 if the Relinquished Property was depreciated over the time owned. Accurate depreciation reporting is critical to accurate tax calculations and proper handling of the net investment income tax.  </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{95}" paraid="696681299">The depreciation schedule helps calculate depreciation recapture, which affects your tax liability. </p>
</li>
</ul>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{101}" paraid="772238353">Since depreciation recapture rules can vary depending on the nature of the depreciable asset, consulting a tax advisor is highly recommended to ensure compliance, navigating net investment income tax implications, and maximize tax benefits. </p>

<h2 aria-level="2" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{111}" paraid="1159433677" role="heading">Reporting a 1031 Exchange </h2>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{117}" paraid="1293668590">When filing your taxes, any 1031 Exchange completed in 2024 must be reported using Form 8824, providing the IRS with a comprehensive record of your exchange.  </p>

<h4 aria-level="3" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{123}" paraid="1059791881" role="heading">Documents Needed to Complete Form 8824 </h4>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{129}" paraid="1964131452">Accurate and complete documentation is crucial for properly filling out Form 8824. Here is what you'll need: </p>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{135}" paraid="853919950">Closing Statements: These include the final settlement documents for both the sale of the Relinquished Property and the purchase of the Replacement Property(ies). They provide key details, such as sale prices, transaction dates, and any adjustments made at closing. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{143}" paraid="1173459907">Exchange Agreement: The Qualified Intermediary (QI) will provide this document, which outlines the structure of the exchange and confirms it meets IRS requirements. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{151}" paraid="1606313963">Depreciation Schedules: If the Relinquished Property was used for business or investment purposes, the depreciation schedules must be included. These are essential for calculating depreciation recapture, which may impact your tax liability upon sale.  </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{159}" paraid="1482955260">Timeline Records: Maintain a detailed log of key dates, such as the date the Relinquished Property was sold, the date you identified potential Replacement Properties (within the 45-day identification period), and the date you acquired the Replacement Property(ies) (within the 180-day exchange period). Many QIs will provide this information as part of an exchange summary at the conclusion of the 1031 Exchange. </p>
</li>
</ul>

<h2 aria-level="2" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{167}" paraid="218972272" role="heading">Special Considerations for 1031 Exchanges Conducted in 2024 </h2>

<h3 aria-level="3" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{173}" paraid="1952196237" role="heading">1031 Exchanges That Span Two Tax Years </h3>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{179}" paraid="605552464">When a <a href="https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Exchange spans two tax years</a>, such as those initiated after July 5, 2024, the 180-day exchange period will extend into 2025. However, the entire exchange will be reported on the 2024 tax return, regardless of when the Replacement Property(ies) are acquired, provided the exchange was successful. Additionally, if any funds remain in the exchange account due to unacquired properties or failure to complete the exchange before the deadline, they cannot be returned before January 1 of the following year, potentially creating tax implications. </p>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{200}" paraid="591494402">To fully utilize the 180-day exchange period without being impacted by the April 15 tax deadline, Exchangers initiating exchanges after October 18, 2024, must file a tax extension using Form 4868, which provides an additional six months to report the exchange and avoid forfeiting time in the 180-day window. </p>

<h3 aria-level="3" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{206}" paraid="222936453" role="heading">Failed 1031 Exchanges </h3>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{212}" paraid="1814642855">Understanding the distinction between a successful and failed 1031 Exchange is crucial to proper tax reporting. A successful exchange adheres to IRS rules, including identifying Replacement Property(ies) within 45 days and completing the acquisition within 180 days or the due date of the tax return for the year in which the exchange commenced, allowing for tax deferral to be reported on Form 8824. However, if an exchange fails, such as failure to identify or acquire Replacement Property(ies), as well as failure to fully utilize exchange funds, any unused funds are returned subject to the standard associated taxes including federal capital gain, depreciation recapture, state, and net investment income taxes. </p>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{226}" paraid="1252674543">For exchanges spanning two tax years, such as one initiated in late 2024 with funds returned in 2025, the gain is generally reported in the year the funds are received, unless a special election is made to recognize the gain in the sale year under <a href="https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Section 453 installment sale rules</a>. This option can provide short-term tax deferral, offering flexibility in managing tax obligations. Additionally, if the exchange results in taxable "boot" due to partial Replacement Property acquisition, installment sale rules allow taxes on the boot to be paid in the following year, rather than being paid entirely in the year of the exchange. </p>

<h3 aria-level="3" paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{237}" paraid="1164054245" role="heading">State-level Tax Implications  </h3>

<p paraeid="{1efaa3c7-56bf-4145-8ace-981b97e701a9}{243}" paraid="902228563">State-level tax implications can add additional considerations when completing a 1031 Exchange. Certain states, like <a href="https://www.accruit.com/blog/california-require-irc-section-1031-taxpay…;, have specific reporting requirements. For example, California requires Exchangers to file Form 3840 to track deferred gains within the state. This is particularly important because California does not conform to federal tax deferral rules for 1031 Exchanges. Even if the Replacement Property is located outside California, the state requires Exchangers to report the sale of the Relinquished Property and the acquisition of the Replacement Property(ies) within its jurisdiction. Additionally, California imposes tax on any capital gains from the exchange if the Replacement Property is sold outside the state without a new 1031 Exchange, and failure to comply with these reporting requirements could result in penalties. It's crucial to review the tax laws of all relevant jurisdictions, as states may have differing rules for reporting deferred gains and other tax obligations, ensuring full compliance with all state-specific requirements. </p>

<p paraeid="{78d5f337-162a-4a56-a311-fd0aa3cac7f8}{1}" paraid="745222235">As always, we recommend that Exchangers work closely with their tax preparer, advisor, or CPA to ensure accurate reporting and compliance when filing their tax return for the 1031 Exchange. For a complete breakdown of tax items for the year, visit the <a href="https://www.irs.gov/">IRS website</a>.</p>

<p paraeid="{78d5f337-162a-4a56-a311-fd0aa3cac7f8}{14}" paraid="1980857402"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. </em></p>

Wed, 01/29/2025 - 15:33

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Video: Considerations for Easements as Relinquished Property in a 1031 Exchange

01/22/25

This video dives into the use of easements and long-term leases as Relinquished Property in a 1031 Exchange. We cover key ...

Authored by: meredithb@accruit.com

Authored on: Wed, 01/22/2025 - 15:36

<p>In this educational video, we take a close look into the use of easements and long-term leases as Relinquished Property in a 1031 Exchange, highlighting the key requirements for these property types to qualify as like-kind property. Requirements include easements must generally be perpetual and require careful attention to the terms of the agreement. Similarly, leasehold interests often need to be structured as long-term agreements with specific provisions to meet 1031 qualifications.</p>

<p>We also discuss additional considerations for <a href="https://www.accruit.com/blog/often-overlooked-section-1031-property-rig… leasehold interests</a> with an emphasis that the lessee, not the lessor, holds the exchangeable interest. When all considerations are met Exchangers are able to utilize proceeds from the sale of easements and long-term leases as Relinquished Property to acquire Replacement Property in a 1031 Exchange.</p>

Thu, 01/23/2025 - 16:17

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Understanding Related Party Rules in 1031 Exchanges

01/15/25

A "related party" includes certain family, business entities, and fiduciaries. Based on the Related Party Rule, many believe 1031 Exchanges involving ...

Authored by: meredithb@accruit.com

Authored on: Wed, 01/15/2025 - 15:11

1031 Exchange General

<p>There is often confusion surrounding 1031 Exchanges and related parties. A common misconception about 1031 Exchanges is that transactions involving related parties are prohibited. In reality, exchanges involving related parties are allowed, but come with stricter rules and oversight to ensure compliance with the tax code. Another point of confusion is what qualifies as a "related party". Many assume it applies only to relatives, but the definition extends beyond family to include certain business entities and fiduciary relationships. Understanding related party rules is critical for investors looking to utilize a 1031 Exchange that is compliant with the tax code.</p>

<h2 aria-level="2" paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{121}" paraid="1908381897" role="heading">Who is a Related Party? </h2>

<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{127}" paraid="1232734130">The Internal Revenue Code provides clear guidelines on who qualifies as a <a href="https://www.accruit.com/blog/1031-tax-deferred-exchanges-between-relate… party</a> in 1031 Exchanges. Under Sections 267(b) and 707(b)(1) of the Internal Revenue Code, related parties include: </p>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="3" role="listitem">
<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{144}" paraid="1770392009">Immediate Family Members: Siblings, spouses, ancestors (parents, grandparents), and descendants (children, grandchildren). </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="3" role="listitem">
<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{152}" paraid="1446133979">Business Entities with Significant Ownership or Control: Entities where the Exchanger holds more than 50% ownership, such as corporations, partnerships, or trusts; two corporations that are members of the same controlled group; and corporations and partnerships with more than 50% direct or indirect common ownership. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="3" role="listitem">
<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{160}" paraid="1626271083">Certain Fiduciary Relationships: Ex. An Exchanger and the fiduciary of a trust. </p>
</li>
</ul>

<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{176}" paraid="364697859">This broad definition ensures that any transaction involving individuals or entities with close personal or financial ties is subject to heightened scrutiny. <a href="https://www.accruit.com/blog/video-related-party-rules-1031-exchange">T… Related Party Rules</a> are designed to prevent potential abuse, such as shifting tax liabilities or inflating property values in ways that undermine the intent of a 1031 Exchange. </p>

<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{197}" paraid="581392881">It's also important to note that these relationships are closely monitored to ensure the legitimacy of the transaction. If an exchange involving related parties fails to meet the requirements, the transaction may be disqualified, and tax deferral could be denied. Understanding these parameters is essential for Exchangers considering transactions with related parties. </p>

<h2 aria-level="2" paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{203}" paraid="1864790775" role="heading">The Tax Reform Act of 1984 </h2>

<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{209}" paraid="1705335478">Before the 1980s, Exchangers could potentially conduct a 1031 Exchange with related party real estate to manipulate property values or defer taxes improperly. For instance, two related parties might exchange properties where one has experienced significant appreciation, in order to shift tax liabilities. To address this issue, Congress strengthened the statute. The Tax Reform Act of 1984 introduced critical changes to related party exchanges, implementing safeguards to ensure these transactions were legitimate and not used to evade taxes. </p>

<h3 aria-level="3" paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{241}" paraid="623194901" role="heading">Direct Related Party Exchanges </h3>

<p paraeid="{855cee55-74a3-4f1f-8bb9-b798e897db83}{248}" paraid="28134364">The introduction of the two-year holding period under the Tax Reform Act of 1984 fundamentally reshaped the landscape of 1031 Exchanges involving related parties. This rule only applies to a direct swap, which occurs when both parties directly swap properties with one another simultaneously and stipulates that both parties must hold their new properties for at least two years following the transaction. If either party disposes of their exchanged property within the two-year window, the tax-deferral benefit is retroactively revoked, and the original capital gain becomes fully taxable in the year the property is transferred. Again, this rule is only true in a direct exchange between related parties and does not apply if an Exchanger sells their Relinquished Property to a related party or purchases their Replacement Property from a related party. </p>

<h4 aria-level="4" paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{65}" paraid="1995206494" role="heading"><em>Exceptions to the Two-Year Rule </em></h4>

<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{72}" paraid="2036733623">There are specific circumstances where the two-year holding period rule does not apply. One circumstance involves the death of an involved party. If one of the parties involved in the exchange passes away during the two-year period, the rule is waived. Another exception includes situations like eminent domain or natural disasters that force the disposition of a property. For example, the holding period requirement may be waived if a government agency acquires the property for public use or a disaster makes the property unusable. Lastly, the rule does not apply if the IRS determines through an audit that the transaction was not structured to avoid taxes, requiring the Exchanger to demonstrate legitimacy of their intent for the transaction. </p>

<h3 aria-level="3" paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{88}" paraid="1525750434" role="heading">Relinquished Property to Related Party Considerations </h3>

<p aria-level="2" paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{95}" paraid="118077204" role="heading">Selling Relinquished Property to a related party in a 1031 Exchange is generally more straightforward than other related party scenarios. Unlike direct exchanges, there are no specific holding period requirements if an Exchanger sells their Relinquished Property to a related party in a 1031 Exchange. As long as the sale of the Relinquished Property complies with IRC Section 1031 guidelines, such as proper use for business/investment purposes and adherence to identification and timing rules, it can proceed without any additional considerations. </p>

<h3 aria-level="3" paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{109}" paraid="1058865449" role="heading">Considerations for Buying Replacement Property from a Related Party </h3>

<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{116}" paraid="1447273265">Buying Replacement Property from a related party, however, involves stricter requirements. In order for this transaction to qualify under 1031 Exchange rules, the related party selling the Replacement Property must also be conducting a 1031 Exchange. In this case, the Replacement Property being acquired would simultaneously serve as the related party’s Relinquished Property. If the related party is not conducting a 1031 Exchange, the transaction would be disqualified from 1031 Exchange treatment under IRS regulations.  </p>

<h2 aria-level="2" paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{128}" paraid="1676427035" role="heading">Why Related Party Rules Exist </h2>

<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{135}" paraid="1390547871">The two-year holding period and Related Party Rules from the 1984 amendment were designed to protect the integrity of the tax system. Before these changes, related party transactions in 1031 Exchanges could be misused for tax avoidance. When it applies, the holding period seeks to avoid improper basis shifting between the related parties. For example, consider two related parties: Party A and Party B. Party A owns a property with a low adjusted basis while Party B owns a property with a high basis. If Party A exchanges their property for Party B’s property, Party A transfers their low basis to Party B, avoiding substantial taxation upon sale. Party B could then sell the acquired property after the exchange, incurring minimal taxable gain due to the higher basis, which undermines the intended purpose of a 1031 Exchange.   </p>

<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{159}" paraid="1931635302">By addressing ambiguities surrounding these exchanges, the amendment boosts confidence in the fairness of the tax code. <a href="https://www.irs.gov/pub/irs-pdf/f8824.pdf">IRS Form 8824</a> reflects the heightened scrutiny of related party exchanges and outlines steps for Exchangers to ensure compliance. Specifically, lines 7-11 require Exchangers to disclose detailed information about the related party, the nature of the relationship, and whether the Relinquished and Replacement Property(ies) were transferred to/from a related party. These disclosures help the IRS identify potential compliance issues within a related party exchange. </p>

<h2 aria-level="2" paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{182}" paraid="1665446550" role="heading">Considerations for Related Party 1031 Exchanges </h2>

<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{192}" paraid="792644693">For Exchangers considering a 1031 Exchange that involves a related party, here are some key considerations: </p>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{204}" paraid="2024623508">Plan for the Two-Year Holding Period: Ensure that both you and the related party can hold the exchanged properties for at least two years where it is applicable. Disposing of property before the two-year period will trigger immediate tax consequences. </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{218}" paraid="60795666">Document the Transaction: Maintain clear records of the exchange, including appraisals, contracts, and any correspondence with the related party. This documentation will be critical if the IRS scrutinizes the transaction.  </p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{226}" paraid="430903581">Seek Professional Guidance: Related party transactions are complex and monitored closely by the IRS. To ensure compliance with all regulations, consult tax and legal advisors and work with a Qualified Intermediary like Accruit, who specializes in 1031 Exchanges. </p>
</li>
</ul>

<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{240}" paraid="1982709989">By understanding these considerations, Exchangers can confidently navigate the complexities of related party transactions while preserving the benefits of a 1031 Exchange. With careful planning, thorough documentation, and professional support, Exchangers can avoid common pitfalls and achieve a successful investment strategy.  </p>

<p paraeid="{11b2d51f-fe11-460b-a958-173b1993988c}{246}" paraid="1619764858"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.  </em>    </p>

Wed, 01/15/2025 - 20:04

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The IRS Announces Tax Relief for California Taxpayers Impacted by Wildfires

01/15/25

In response to the California wildfires, the IRS has announced extended tax relief for impacted Taxpayers within Los Angeles County ...

Authored by: meredithb@accruit.com

Authored on: Wed, 01/15/2025 - 07:40

Company and Industry News

<h3 paraeid="{89b384a6-5521-41e7-a220-e57e6779373d}{185}" paraid="760886701">Due to California wildfires, the IRS has issued Tax Relief for Los Angeles County. </h3>

<p><span style="font-size:12.0pt"><span style="font-weight:normal">Affected Taxpayers have until <strong>October 15, 2025,</strong> to make tax payments and file for various individual and business tax returns.  </span></span></p>

<p><span style="font-size:12.0pt"><span style="font-weight:normal">Currently, all individuals and households that reside in or have a business within Los Angeles County qualify for tax relief. Any area added to the disaster area at a later time will also qualify for tax relief.  </span></span></p>

<p><strong>Who is an "Affected Taxpayer"? </strong></p>

<p><span style="font-size:12.0pt"><span style="font-weight:normal">An “Affected Taxpayer” includes individuals who live, and businesses whose principal place of business is in the Covered Disaster Area. Affected Taxpayers are entitled to relief regardless of where the Relinquished Property or Replacement Property is located. Affected Taxpayers may choose either the General Postponement relief under Section 6 OR the Alternative relief under Section 17 of Rev. Proc. 2018-58. Taxpayers who do not meet the definition of Affected Taxpayers do not qualify for Section 6 General Postponement relief. </span></span></p>

<p><strong>Relief Specific to 1031 Exchanges for Affected Taxpayers</strong></p>

<p><span style="font-size:12.0pt"><span style="font-weight:normal">General Postponement under Section 6 of Rev. Proc. 2018-58 under Section 6 of Rev. Proc. 2018-58 (Affected Taxpayers only). Any 45-day deadline or 180-day deadline (for either a forward or reverse exchange) that falls on or after the Disaster Date above is postponed to the General Postponement Date. The General Postponement applies regardless of the date the Relinquished Property was transferred (or the parked property acquired by the EAT) and is available to Affected Taxpayers regardless of whether their exchange began before or after the Disaster Date. </span></span></p>

<p><strong>Relief for Taxpayers with Related Difficulties</strong></p>

<p><span style="font-size:12.0pt"><span style="font-weight:normal">Section 17 Alternative (Available to (1) Affected Taxpayers and (2) other Taxpayers who have difficulty meeting the exchange deadlines because of the disaster. See Rev. Proc. 2018-58, Section 17 for conditions constituting “difficulty”). Option Two is only available if the Relinquished Property was transferred (or the parked property was acquired by the EAT) on or before the Disaster Date. Any 45-day or 180-day deadline that falls on or after the Disaster Date is extended to THE LONGER OF: (1) 120 days from such deadline; OR (2) the General Postponement Date. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the Relinquished Property (typically, if an extension was filed, 9/15 for corporations and partnerships and 10/15 for other Taxpayers).  </span></span></p>

<p><a href="https://www.irs.gov/newsroom/irs-california-wildfire-victims-qualify-fo… style="font-size:12.0pt"><span style="font-weight:normal">Visit for full details on the tax relief for Los Angeles wildfires. </span></span></a></p>

<p><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. </em></p>

Wed, 01/15/2025 - 17:12

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2024 A Year in Review

01/09/25

Accruit's 2024 infographic encapsulates our significant accomplishments over the past year. The infographic highlights substantial growth across all of our product ...

Authored by: marketing

Authored on: Thu, 01/09/2025 - 10:10

Company and Industry News

<p>It is with great excitement that Accruit presents our 2024 Year in Review infographic, a vibrant encapsulation of our remarkable achievements over the past year. This visually engaging infographic highlights the substantial growth across all of our product lines, underscoring our unwavering commitment to innovation and market responsiveness. </p>

<p>Moreover, the infographic emphasizes our active involvement in the industry and our dedication to educating various audiences on 1031 exchanges. Through participation in various events, conferences, and workshops, we have shared our expertise and fostered a deeper understanding of tax deferred exchanges, helping clients navigate their complexities with confidence. </p>

<p>2024 was a tremendous success. We look forward to another great year ahead, our team will continue to revolutionize the 1031 industry through our innovative solutions and exceptional customer service. </p>

Thu, 01/09/2025 - 17:15

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Key Considerations for Owning Investment Real Estate in an LLC and Navigating 1031 Exchanges

01/07/25

This article discusses some of the issues to be considered when investment real estate is owned in an LLC. Many ...

Authored by: marketing

Authored on: Tue, 01/07/2025 - 08:50

1031 Exchange General

<p>Many conversations with real estate investors who call us as an exchange <a href="/blog/what-qualified-intermediary" title="1031 Exchange Qualified Intermediary">Qualified Intermediary</a> start with an inquiry such as, “My investment property is owned in an LLC. Is there anything special for me to consider regarding my 1031 Exchange?” There are many considerations for issues that arise from real estate owned in an LLC.</p>

<p>It is common knowledge that “LLC” is an acronym for Limited Liability Company. A Limited Liability Company is a business structure specifically authorized by state statute, and the rules in each state vary. However, there are some commonalities that cross state lines. For example, the owners of the LLC are called “members.” A properly structured and operated LLC protects its members from being personally pursued for any of the LLC’s debts or liabilities. There are two main types of LLCs, single-member LLC and multi-member LLC. A single-member LLC, often abbreviated as “SMLLC”, is a disregarded entity. As a disregarded entity, it is treated as a “pass-through” entity for income tax purposes, and all income and losses are reflected on the member’s personal income tax return. A multi-member LLC is a legal partnership and is itself a Taxpayer that must file its own income tax return. The profits and losses in a multi-member LLC are shared among the members, proportionate to their investments in the LLC. For example, if one member contributed 50% of the start-up capital, another contributed 30%, and the remaining member contributed 20%, the profits and losses will be allocated proportionate to their contributions. Some states offer Series LLCs, which have some economies to offer when multiple LLCs are needed.</p>

<h3>Maintaining LLC Status</h3>

<p>To maintain the protections afforded by the LLC structure, the LLC members must comply with a variety of state rules. Typically, these include holding annual member meetings, paying annual LLC fees to the Secretary of State, maintaining an in state registered agent, keeping business and personal finances separate, avoiding the use of business funds for personal expenses, and complying with the entity’s Operating Agreement. Additionally, Multi-Member LLCs will have an Employer Identification Number (EIN), which is required for the necessary tax reporting for a partnership. A Single-Member LLC is not required to obtain an EIN, but is permitted to do so if the member so chooses. Further, if a real estate acquisition is funded with a bank loan, even for a single-member LLC, banking regulations require that the LLC have an EIN. Failure to comply with the rules the state imposes on LLCs could result in “piercing the corporate veil” and allowing creditors to have access to the members’ personal assets for satisfaction of debts and liabilities.</p>

<h2>Implications of Owning Investment Real Estate in an LLC</h2>

<p>To understand the implications of owning investment real estate within an LLC, the first thing that must be determined is whether the LLC is a single-member or multi-member LLC. This determination is important because of the <a href="/blog/same-taxpayer-requirement-1031-tax-deferred-exchange" title="Same Taxpayer Rule in a 1031 Exchange">Same Taxpayer Rule</a>, which mandates that the Taxpayer who sells the Relinquished Property(ies) must be the same Taxpayer that acquires the Replacement Property(ies), and the classification of the LLC plays a role in meeting this requirement. Clarifying whether the LLC is treated as a disregarded entity or separate taxable entity is crucial to ensuring compliance with this rule and avoiding complications in the exchange process.</p>

<p>At times, further inquiry needs to be conducted by the member(s) or their advisory team to confirm the type of entity. The Operating Agreement created at the time the LLC was formed will provide this distinction. The Operating Agreement contains many provisions including identifying the member(s) and verifying the relative ownership interests among the members, among others. Usually, the Operating Agreement is created when the LLC is formed with the assistance of an attorney or other professional service. However, when investors form LLCs online without professional assistance, or when they reside in states that do not require an Operating Agreement, they may not exist. In the absence of an Operating Agreement, it is best to determine whether the LLC files its own income tax returns or reflects the ownership of the real estate on the member’s personal income tax return. Due to the Same Taxpayer Rule, maintaining the tax continuity of the Exchanger is required, it is necessary to structure the 1031 Exchange consistent with the way the LLC has been filing annual tax returns. If it can be confirmed that the LLC is being treated as a disregarded entity, then the 1031 Exchange can be structured by reflecting the member as the Taxpayer.</p>

<p>When the Relinquished Property is owned in a Single-Member LLC, a disregarded entity, it gives the Exchanger some additional flexibility in the acquisition of the Replacement Property(ies). This is ideal because many investors often prefer to acquire new properties in a new Single-Member LLC to enjoy the protections afforded by the LLC structure noted above, including liabilities and debts being isolated within the LLC. So long as the same member is the member of the new SMLLC, they are in compliance with the Same Taxpayer Rule. Additionally, a surface level advantage of a SMLLC is that investors often like to name their LLCs to correspond with the property that it owns, i.e., ‘1313 Mockingbird Lane LLC.’ Naturally, the investor would not want to acquire 1428 Elm Street in the name of 1313 Mockingbird Lane LLC. Since 1313 Mockingbird Lane LLC is a disregarded entity, the investor can acquire the Replacement Property under 1428 Elm Street LLC without jeopardizing the 1031 Exchange. The important thing to note is that owning both the Relinquished and Replacement Properties in a SMLLC provides for ongoing protections afforded by the LLC structure.</p>

<p>As noted above, a Multi-Member LLC is a tax partnership, and its own unique Taxpayer. When a Multi-Member LLC owns the property, the 1031 Exchange is to be set up under the name of the LLC. For example, when the members of 4 Privet Drive LLC want to sell their current investment property, their options for purchasing Replacement Property are somewhat limited because of the Same Taxpayer Rule. They could acquire the Replacement Property in the name of 4 Privet Drive LLC, which wouldn’t make much sense if they are acquiring 1630 Revello Drive. In addition, using the old LLC to hold the new property might make the new LLC liable for claims that may come up in regard to the old property ownership. However, because they wish to maintain the protections of the LLC structure, while also changing the way the new property is held, a new LLC, 1630 Revello Drive LLC, could be created to take title in that name, if 4 Privet Drive LLC is the sole member of the new entity.</p>

<h2>1031 Exchange Involving Multi-Member LLCs</h2>

<p>Sometimes when property is held within a Multi-Member LLC not all members have the same opinion of what they want to do with their portion of the sale proceeds. One possibility is where all members of the LLC want to go their separate ways, each doing their own 1031 Exchange. That results in what would be called a “drop and swap”, where all members drop their LLC interest to a Tenants-In-Common interest and complete their own 1031 exchanges. Much has been written about the <a href="/blog/1031-drop-and-swap-out-partnership-or-llc" title="Drop and Swap Strategy in a 1031 Exchange">drop and swap</a> strategy, and its relative merits in the 1031 exchange context.</p>

<p>However, if multiple members are willing to stay inside the LLC, even though one party wishes to leave, there are other options. Consider a three-member LLC, where each member owns 1/3 of the membership interests, but one member wishes to leave. In this situation, Three Friends LLC could allow one member to leave in exchange for a 1/3 <a href="/resources/rev-proc-2002-22-tenants-common" title="Revenue Procedure 2002-22 Tenants in Common">Tenant-in-Common</a> interest in the real estate, while the other two members remain inside Three Friends LLC. At closing, the departing member takes their respective share of the proceeds while Three Friends LLC continues and completes its 1031 Exchange with 2/3 of the proceeds. Note that this is a simplified statement of how the structure changes, and investors considering this should consult with their tax and legal advisors prior to initiating an exchange.</p>

<p>Adding members to the LLC also has multiple possible outcomes. If the LLC is already a partnership, then admitting additional members does not change anything for 1031 Exchange purposes. There are accounting issues that the accountant would normally address. However, if the LLC was a single-member LLC, which is being treated as a disregarded entity, then adding a new member creates a partnership, which cannot be a disregarded entity. This situation often arises when one spouse has premarital investment property, and they are now wanting to structure a 1031 Exchange and add their spouse as a partner on the Replacement Property. For example, when Gomez was single, he bought his current investment property and the title is vested in Addams Realty Holdings LLC, of which he is the sole member. Now that he is contemplating a 1031 Exchange, Morticia wants to be a member of the LLC so that she has ownership interests in the Replacement Property. This should not be done, as it would convert the disregarded entity into a partnership, creating a new Taxpayer. It should be possible to change to a partnership when some time has passed from the exchange transaction. It is best to consult with the tax adviser to determine the appropriate amount of time.</p>

<h3>Community Property States</h3>

<p>Community <a href="/blog/1031-exchanges-state-tax-law-considerations" title="State Law and Community Property States pertaining to a 1031 Exchange">property laws</a> dictate how property is owned and managed between spouses in certain states. These laws establish that all assets acquired during the marriage are considered jointly owned by both spouses, regardless of whose name is on title. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These laws impact 1031 Exchanges for LLCs owned by married couples who live in those states. According to IRS Revenue Procedure 2002-69, if the LLC is properly formed, its only members are a married couple who reside in a community property state, and the couple elected to treat the LLC as a disregarded entity for federal tax purposes, the IRS will recognize it as disregarded. This allows flexibility for spouses residing in a Community Property state who are involved in a 1031 Exchange. to treat the LLC as a disregarded entity for federal tax purposes, the IRS will recognize it as disregarded. This allows flexibility for spouses residing in a Community Property state who are involved in a 1031 Exchange.</p>

<p>In looking at the example above, if Gomez and Morticia live in a community property state, Gomez could add Morticia as a member of Addams Realty Holdings LLC without jeopardizing the LLC's status as a disregarded entity. This means their 1031 Exchange could proceed with the same LLC even though Morticia will be added as a member of the LLC.</p>

<p>As discussed, owning investment real estate in an LLC can add an additional layer of complexity when a 1031 Exchange is being considered. When structuring a 1031 Exchange involving real estate vested in an LLC or being bought in the name of an LLC, additional care must be taken to ensure compliance with the 1031 Exchange rules. Exchangers are encouraged to consult with their tax and legal advisors before the move forward with the sale or purchase of investment real estate, and to engage a Qualified Intermediary like Accruit, before the first closing that will be part of their 1031 Exchange.</p>

Tue, 01/07/2025 - 14:53

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