Sometimes the majority of members will want to make an exchange and one or more minority members will simply want to pay. In this case, the drop-and-swap can also be used by abandoning the shares of the property in the outgoing members, while the limited liability company enters into an llc-level exchange and the former members pay and pay the taxes due. For some time, several groups have recommended that the IRS allow outgoing members to tie their holding periods as members before exchanging their individual ownership shares. The Joint Committee on Taxation, which develops recommendations over several years on taxation, found that there are other requirements that must also be taken into account in the agreement of the co-owners, such as the mechanics for hiring and firing the property manager, the exercise of a right to division and the allocation. For example, distributions under a tax-compliant condominium structure, free of charge (at market rates), must be made exclusively in accordance with the co-owners` holdings. The inclusion of non-market royalties or non-proportional distribution (for example. B to a project developer) thus increases the tax risk of redesigning the condominium structure as a partnership. This “drop and swap” strategy is by far the most common when it comes to an LLC that sells investment real estate that some members do not want 1031x and others. As noted above, it must have been held for the exchange of real estate by the subject for use in a business or for investments. Therefore, if, on the eve of the closing of the sale of the abandoned property, a tax is rehabilitated to the outgoing member, it would be difficult to say that she personally kept the property for a real period of time. However, if outgoing members wish to pay, the “held for” requirement is not an issue, as the exchange takes place at the LLC level and the LLC has clearly considered the property to be a qualified use for a considerable period of time.
It is not important that the outgoing members have not met the conditions of the detention period, as they do not wish to obtain exchange status. Remember, when it comes to 1031 scholarships, the owner of the current property must be the owner of the replacement property. Therefore, if a business owns land, sells it and opens a 1031 exchange, the replacement property must be purchased by the same company. There are some exceptions, but you need to work closely with your intermediary to ensure that the exemption applies to your transaction. The date on which the transfer of ownership by LLC to the co-owners could be considered a relevant factor in deciding whether the “Drop and Swap” structure is being met by the IRS. In addition to the similar requirement, section 1031 provisions for similar deferred tax exchange treatment require the changing tax payer to consider abandoned assets “as investments.” If the sale of the property by LLC to the co-owners is not registered until the time prior to the sale of the property to third parties, the IRS may conclude that the co-owners acquired their co-ownership interest in the property for immediate sale and not investment.