Using a LLC | Commonwealth1031

USING A LIMITED LIABILITY COMPANY (LLC)

Can I Do a 1031 Exchange If the Relinquished Property Is Owned by One Single-Member LLC (or individual) and the Replacement Property Is Purchased by a Different Single-Member LLC?

Yes, you can — but only if both single-member LLCs are owned by the same individual (or entity) and both are treated as disregarded entities by the IRS. This is also true if an individual sells a relinquished property and uses a LLC to purchase the replacement property.

IRS Rule: "Same Taxpayer" Requirement

For a 1031 exchange to be valid, the same taxpayer who owns the relinquished property must be the one to acquire the replacement property. The IRS focuses on who is ultimately responsible for the tax liability, not necessarily the LLC names or EINs.

If both the relinquished and replacement properties are held in different single-member LLCs, but both LLCs are 100% owned by the same individual (or revocable trust, etc.), the IRS still considers this the same taxpayer. Therefore, the exchange can qualify under Section 1031.

✅ Example: Allowed

You own Property A in ABC Investments LLC, a single-member LLC owned solely by you.
You sell Property A and purchase Property B using XYZ Holdings LLC, another single-member LLC also owned solely by you.

Since both LLCs are disregarded entities and have the same sole owner, this structure satisfies the "same taxpayer" requirement. The IRS sees you — the individual — as the owner in both cases.

❌ Example: Not Allowed

Property A is held by ABC Investments LLC, which is a single-member LLC owned by you.
Property B is purchased by XYZ Holdings LLC, which is a partnership (e.g., owned 50/50 by you and another person).

Even though your name is associated with both entities, the ownership structure has changed, and you are no longer the same taxpayer. This would disqualify the 1031 exchange, unless advanced planning (e.g., a drop-and-swap) is done well in advance.

Best Practices

Ensure both LLCs are truly disregarded entities (single-member and not taxed as corporations).
Maintain consistent ownership — no changes in who ultimately owns the property.
Avoid forming a new LLC with different ownership between the sale and purchase.
Work with a 1031 exchange accommodator and tax advisor to confirm structure before closing.

✅ Different single-member LLCs can be used in a 1031 exchange, as long as:

Each is 100% owned by the same person or entity
Each is treated as a disregarded entity for tax purposes
There is no change in the underlying taxpayer
An individual can be the owner of the reliquished property and use a LLC to buy the replacement property - an vice versa.

Note:

If a single-member LLC (SMLLC) sells the relinquished property and the individual owner of that LLC (not the LLC itself) buys the replacement property in their own name, the 1031 exchange will generally not qualify — even though the individual and the LLC may be closely connected.

❌ Not Allowed: SMLLC Sells → Individual Buys

Here's why:

The IRS requires the same taxpayer to sell and acquire both properties in a 1031 exchange. While a single-member LLC is typically a disregarded entity for tax purposes (meaning it's treated as the same as its sole owner), that only applies as long as the ownership vehicle remains consistent.

If the SMLLC sells the relinquished property…
And the individual (in their personal name) acquires the replacement property…

👉 The IRS sees two different taxpayers — the LLC as seller, and the individual as buyer — even though they’re related.

This breaks the “same taxpayer” rule and disqualifies the exchange.

✅ Allowed: Individual Sells → SMLLC Buys

✅ Allowed: SMLLC Sells → SMLLC Buys (same owner)

These are allowed because in both cases, the taxpayer remains the same in the eyes of the IRS.