Single-member LLC: no problem
A single-member LLC (SMLLC) is a disregarded entity for federal tax purposes — the IRS treats it as indistinguishable from its sole owner. When an SMLLC sells a property and buys a replacement within the 45/180-day windows, the exchange is valid. The taxpayer is the individual (or corporation) who owns the LLC, and they are the same on both sides of the exchange. From a 1031 standpoint, the LLC wrapper is transparent.
Multi-member LLC (partnership): the same-taxpayer rule
A multi-member LLC is treated as a partnership for tax purposes. The partnership itself is the taxpayer, not the individual members. For a 1031 exchange to work at the entity level, the partnership must sell the relinquished property AND acquire the replacement property. This works fine if all partners agree — they all stay in the partnership and roll into the new property together.
The problem arises when partners disagree: one wants to cash out and another wants to continue. You cannot exchange a partnership interest for real property or vice versa — only real property for real property (or personal property for personal property of the same class). The solution most commonly used is the drop and swap: the partnership distributes undivided tenancy-in-common (TIC) interests to the partners before the sale, each partner holds as a co-owner, and each independently decides whether to exchange or cash out.
Drop and swap planning considerations
The drop-and-swap must be done carefully. The IRS requires that any property used in a 1031 exchange be held for investment or use in a trade or business — not primarily for sale. A distribution of TIC interests immediately before a prearranged sale is scrutinized. No fixed safe harbor exists, but IRS private letter rulings suggest that a holding period of several months to a year helps establish investment intent. Plan well in advance, not the week before closing.
Frequently asked questions
Can a single-member LLC do a 1031 exchange?
Yes. A single-member LLC is a disregarded entity — the exchange is attributed to the individual owner, and the same-taxpayer requirement is satisfied.
Can a multi-member LLC do a 1031 exchange?
The LLC (as a partnership) can exchange at the entity level if all partners agree to reinvest. If partners want different outcomes, a drop-and-swap distribution of TIC interests before the sale may allow each partner to act independently.
What is the same-taxpayer rule in a 1031 exchange?
The entity or person who sold the relinquished property must be the same entity or person who acquires the replacement property. You cannot sell as an LLC and buy as an individual.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.