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and Sue do an exchange while
letting Fred take his cash and
pay his tax?”
First of all you can’t dis-
solve the LLC, although this
is a common suggestion from
most attorneys. Section 1031
requires that the property
you’re exchanging must be
held for investment and not for
resale. Although the terms are
not defined by the code, court
cases generally hold that you
have to hold an investment
for more than a year for it to
meet the definition of held
for investment. Dissolving the
LLC and transferring own-
ership to tenants-in-common
will start the one year holding
period over, which will disal-
low your exchanges if you sell
right away. The IRS calls it a
drop and swap and it’s a big
no-no.
However, could you drop
Fred out of the LLC allowing
you and Sue to roll your gains
over? Remember: the taxpay-
er (the LLC in this case) has
to stay intact, but the IRS will
allow you to drop members
out of it as long as more than
half of the original owner-
ship stays intact. If you drop
Fred out of the LLC, you’ll
still have two thirds of the
original ownership, so you’re
okay there.
After you drop Fred out,
the ownership title of the
apartment building will be an
undivided two thirds owned
by the LLC and an undivided
one third owned by Fred. This
means that a third of the pro-
ceeds will go to Fred and two
thirds will go into the LLC’s
1031 exchange account.
What about Fred – how
will this impact him? Well,
there’s another IRS code sec-
tion that says that if you’ve
owned an interest in a partner-
ship or an LLC, and that inter-
est is converted into a tenant-
in-common interest which you
then sell and have to pay tax
on, the holding period of your
ownership of the partnership/
LLC is added to your owner-
ship of your tenant-in-com-
mon interest to determine if
the gain is short-term capital
gain or long-term capital gain.
Long-term capital gains pay
less tax.
The end result of this
strategy is that Fred can buy
his pickup and take his cruise,
and you and Sue can roll your
gain over in a 1031 Exchange.
You and your
co-par tners,
Fred and Sue, have decided
to sell the small apartment
building that you bought a few
years ago. You got it
for a steal and you’ve
got a nice profit
in it. It’s not been
on the market long
and you now have
a full price offer.
You’ve always
assumed that when
you sold this property the
three of you would roll into
the purchase of another prop-
erty, but Fred just told you that
he wants to take his share and
buy a new pickup. Yikes –
and now Sue isn’t she so sure
that she wants to buy another
property. You don’t want to
cash out because you’re pretty
sure that Uncle Sam will take
all your gain in taxes. Maybe
selling the building wasn’t
such a great idea.
Fighting the panic, you
pick up the phone and call us
afraid that you have a total tax
disaster on your hands. You
were hoping that you could
do a 1031 exchange and roll
your gain over to the new
property and you cer-
tainly don’t want to
pay most of your gain
in taxes.
My first question
to you is about how
the title reads on your
apartment build-
ing? You call Fred
and Sue “your partners,” but
what does that mean? Are they
partners in the sense that you
have a partnership that owns
the building and files a part-
nership tax return? Or do you
hold title as tenants-in-com-
mon but consider yourselves
partners in the sense that you
make decisions together?
Section 1031 says that
the taxpayer that owns the
Old Property must be the one
that takes title to the New
Property and report the 1031
exchange on its tax return. In
your case, if your apartment
building is owned by a legal
partnership or an LLC, you,
Fred and Sue must decide as
a group if you’re going to roll
the whole gain over by doing
an exchange, or if you’ll all
cash out and pay your taxes.
On the other hand, if you
hold title individually as ten-
ants-in-common, then your
three separate tax returns own
the apartment building, and
each tax return (meaning each
of you) can decide if you want
to take your share of the cash
and pay the tax, or do an
exchange on your share. What
you do does not depend on
what your partners do.
Bad news – after calling
your CPA you’ve determined
that in fact you do hold title as
an LLC meaning that the LLC
is the one that must do the
exchange. You’ve tried to talk
Fred into going along with you
and Sue in rolling over the
gain, but he’s already picked
the options for his new pick-
up and now he tells you that
he’s also booked a cruise in
anticipation of the money he’s
getting from the sale. Sue’s
figured what her tax would be
if she took the cash and she’s
appalled and is with you on
wanting to roll over the gain.
So you call me back: “can you
...Fighting the
panic, you pick
up the phone
and call us afraid
that you have a
total tax disaster
on your hands...
By Gary Gorman
founder, The
1031 Exchange
Expert’s; LLC
Gary Gorman is the
founder and owner of 1031
Exchange Experts’ LLC,
an independent national
qualified intermediary. A
retired CPA, Gary is the
author of the best-selling
1031 exchange book:
Exchanging Up!, and a
contributor to numerous
publications, including
Forbes, The Wall Street
Journal, Bloomberg’s and
The New York Times. He’s
also a contributing author
of books by Donald Trump
and Rich Dad/Poor Dad
author Robert Kiyosaki.
He can be reached at
or nationwide, toll free at
866-694-0204.
a v a i l a b i l i t y
When we get calls from competitor’s clients, we ask,
Why aren’t you calling Your QI? Here’s a few responses:
They can’t answer my question; or, They won’t return
my calls; or even, They told me to call you(!) Don’t be
abandoned by your QI. We are available 24/7 for your
convenience. Even on weekends and holidays.
Call us!
We want to be your 1031 Qualified Intermediary.
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June 17-June 30, 2015 — COLORADO REAL ESTATE JOURNAL — Page 17