1031 Exchanges for LLCs & Partnerships

The clean case: everyone agrees

If the partnership or multi-member LLC sells its property and buys a replacement as the same entity, the exchange works normally — the entity is the taxpayer on both sides, satisfying the same-taxpayer rule. (Single-member LLCs are simpler still: disregarded for tax purposes, so you and your LLC count as the same taxpayer, and the deed can move between them.)

The hard case: some want cash, some want to exchange

Partnership interests are explicitly excluded from 1031 treatment. A partner can't exchange their share of the LLC — only real estate qualifies. So when three partners want to defer and one wants out, the entity-level exchange serves nobody cleanly.

The drop-and-swap

The standard solution: "drop" the property out of the partnership by distributing it to the partners as tenants-in-common (TIC) — each now directly owns a fractional slice of the real estate. Then each owner "swaps" (or doesn't) individually: cash-out partners take their share as a taxable sale; exchangers roll their TIC interest into their own replacement properties.

Timing is the whole game A drop executed on the eve of closing invites the IRS to argue the partners never truly held the real estate for investment — they held a partnership interest until minutes before the sale. There's no bright-line waiting period, but the earlier the drop happens before a sale (and the more genuinely the TIC owners behave like direct owners — separate reporting, TIC agreement, pro-rata income), the stronger the position. Some states, notably California, actively question drop-and-swaps. Do this with professional guidance, well in advance.

Planning ahead beats unwinding later

Groups buying property together who can imagine diverging exits should consider holding as TIC from day one instead of inside an LLC — each co-owner keeps independent 1031 rights forever, no drop needed. The trade-off is losing the LLC's liability wrapper and lender simplicity; many groups split the difference with each co-owner holding their TIC share in their own single-member LLC.

Model your share of the exchange →Each TIC owner runs their own numbers — start with yours

Common Questions

Can I 1031 exchange my membership interest in an LLC that owns property?

No. Partnership and multi-member LLC interests are excluded from 1031 treatment — only interests in real estate itself qualify. The drop-and-swap exists to convert entity interests into direct real estate ownership first.

How long before a sale should a drop-and-swap happen?

No rule sets an exact period, but the longer the TIC owners genuinely hold and report the property directly before selling — ideally spanning a tax year or more — the stronger the exchange position. Eve-of-closing drops are the pattern that draws challenges.

Does a husband-and-wife LLC count as a partnership for this?

It depends on the state and tax elections. In community property states, a spousal LLC can often be treated as disregarded, keeping things simple. Elsewhere it may be a partnership with all the complications above. Check with your tax preparer.