Individuals and Single Member
LLC's Can Be Interchangeable
In 1031 Transactions

                                                   By Mary Lou Schwab CPA

A limited Liability Corporation (LLC) with a sole shareholder can be used in a 1031 tax deferred exchange interchangeably with the individual shareholder’s name. The IRS recently ruled that a transfer of replacement property in a 1031 exchange directly to a single member LLC owned by a taxpayer does qualify the transaction to meet the non-recognition rules of Section 1031. This was approved even though the title of the relinquished property was held in the individual name of the taxpayer. The IRS reasoned that because the single member LLC is a disregarded entity, the exchange in question would be viewed as if the taxpayer himself had directly received the replacement property, thereby satisfying the requirements for a 1031.

There are advantages of a single member LLC entity over direct personal ownership that include:
     1. Liability protection for the owner from the debts & liabilities of the LLC.
     2. Single level of tax (same tax rate as the individual owner).
     3. Simplified tax reporting.
     4. Every State in the USA allows for domestic single member LLC’s except for New Jersey, Tennessee, California and Massachusetts. These four state do recognize the legal existence of single member LLC’s formed in other states.

A major disadvantage of an LLC is that mortgage loans are not available from portfolio lenders since it is a corporation. Loans are available through commercial banks that generally charge a higher interest rate for a shorter loan term.

In a 1031 Exchange, an entity with a single owner, such as a single member LLC, is “disregarded” as an entity separate from its owner by the IRS. The IRS Looks at both being the same. You may want to contact your legal and tax advisors to determine if a single member LLC is right for you and your investment property.

©2004 Bankers Escrow Corp. Mary Lou Schwab CPA is Vice President of Bankers Escrow Corporation and oversees the 1031 Exchange Division. She has over 22 years experience in real estate taxation. For questions on 1031 exchanges call 303-986-4848 or 800-571-6595. Bankers Escrow Corporation provides qualified intermediary services for all types of exchanges including simple deferred, reverse, construction, leasehold interest and business property exchanges.