Same Taxpayer Requirement: Frequently Asked Questions
The “Same Taxpayer” requirement is straightforward when dealing with individuals. For instance, if John Smith holds title to the Relinquished Property, he must also hold title to the acquired Replacement Property as John Smith. However, the Same Taxpayer requirement becomes less obvious when different types of entities are involved in a 1031 Exchange, such as multi-member LLCs and S-Corps.
Here are answers to frequently asked questions about the Same Taxpayer requirement:
Q: Can spouses who own property as Tenants-in-Common (TIC) take title to the replacement property in just one of their names?
A: Unless the spouses live in a community property state, where title in just one name is still considered jointly owned, they should take title in both names
Q: If a woman sells an investment property under her name, can she put the title of the Replacement Property in both her and her spouse's name?
A: It is not advisable to do so because it does not meet the Same Taxpayer requirement. However, after a few years when the exchange is considered "old and cold," adding the spouse's name would be acceptable
Q: If 111 Main LLC sells Relinquished Property through a 1031 exchange and later quit-claims it to 555 New LLC (with the same members), could there be a problem with the IRS?
A: Two separate LLCs, even with the same members, are not considered the Same Taxpayer. However, changes in ownership structure are generally possible after a period of two or more years. This is based on the general belief of commentators rather than codified rules.
Q: If a single-member LLC has elected to be taxed as an S-Corp, can the owner acquire the Replacement Property in their individual name?
A: In most cases, unexpected issues can arise when trying to change the entity when real estate investments are held in corporations, including S-Corps. It is generally not considered the best way to hold real estate. In this scenario, the Replacement Property would need to be owned by the S-Corp directly or as the single-member of a new LLC, as LLCs don’t cause such issues.
Q: Can a single-member LLC sell the Relinquished Property and a different single member LLC acquire the Replacement Property if the member is the same on both LLCs?
A: Yes, this is possible. Since single member LLCs are tax disregarded, the member's identity determines if the Taxpayer requirement is met. This scenario is common when a taxpayer wants to eliminate potential claims and matters associated with the original LLC by putting the replacement property into a new LLC.
Q: Can the Same Taxpayer add a third party to the acquired Replacement Property if all the proceeds from the Relinquished Property are used?
A: It depends on the structure. If the taxpayer alone owns the relinquished property, adding a new two-person partnership or LLC would not maintain the Same Taxpayer. However, if the two parties held ownership as tenants in common (TIC), it would be acceptable. It's important to consider a TIC Agreement per Rev. Proc. 2002-22 for tenancy in common in an exchange context.
Q: What other title holding options satisfy the Same Taxpayer requirement for someone holding title individually?
A: Any tax disregarded entity, such as a new single member LLC, Revocable Living Trust, Illinois Land Trust, Tenant-in-Common, or being a beneficiary of a Delaware Statutory Trust (DST) would constitute the Same Taxpayer.
To learn more about the Same Taxpayer requirement, read our comprehensive blog post here.