Yes, an LLC or partnership can complete a 1031 exchange, but ownership structure is one of the most misunderstood and potentially problematic areas of Section 1031.

Many investors assume that if a property is owned by an LLC, completing a 1031 exchange is straightforward. In some cases, that is true. In others, ownership structure can create significant challenges that jeopardize tax deferral entirely.

The key issue is that the IRS focuses heavily on who owns the property before the exchange and who owns the replacement property afterward. Changes in ownership, partnership disputes and last-minute restructuring attempts can create unexpected tax consequences if not planned correctly.

This guide explains how 1031 exchanges work with LLCs, partnerships, multi-member ownership structures and common strategies investors use when owners want different outcomes.

The Short Answer

An LLC can complete a 1031 exchange. A partnership can complete a 1031 exchange.

However, the entity that sells the relinquished property generally must be the same entity that acquires the replacement property.

This principle is commonly known as the same taxpayer rule and is one of the most important concepts investors need to understand.

Understanding the Same Taxpayer Rule

One of the foundational requirements of a 1031 exchange is continuity of ownership. The taxpayer selling the relinquished property must generally be the taxpayer acquiring the replacement property.

For example:

Typically Works

  • John owns a rental property individually and acquires replacement property individually.
  • ABC LLC owns investment property and acquires replacement property through ABC LLC.
  • XYZ Partnership sells and acquires property through the same partnership.

Potential Problems

  • Property is owned by a partnership but individual partners want separate replacement properties.
  • Property is sold by an LLC but replacement property is purchased individually.
  • Ownership percentages change during the exchange process.

These situations often require advance planning and specialized legal and tax guidance.

Can a Single-Member LLC Do a 1031 Exchange?

In many cases, yes. A single-member LLC is often treated as a disregarded entity for federal tax purposes.

Because the IRS generally treats the owner and the LLC as the same taxpayer, exchanges involving single-member LLCs are usually straightforward.

Example

Sarah owns a rental property through Sarah Investments LLC, a single-member LLC.

The LLC sells the property.

The LLC acquires replacement property.

Because ownership remains consistent, the exchange may qualify if all other requirements are satisfied.

Investors should still confirm ownership structure with their tax advisor before proceeding.

Can a Multi-Member LLC Do a 1031 Exchange?

Yes. However, additional complexity arises because multi-member LLCs are typically taxed as partnerships. The exchange generally occurs at the entity level rather than the individual member level.

Example

ABC Investments LLC has three members:

  • Partner A: 40%
  • Partner B: 30%
  • Partner C: 30%

The LLC owns an apartment building.

If the LLC sells the property, the LLC generally completes the exchange and acquires replacement property.

Individual members typically cannot simply take their share of proceeds and perform separate exchanges after closing.

This is where many ownership disputes arise.

Can a Partnership Do a 1031 Exchange?

Yes. Partnerships frequently use 1031 exchanges to defer capital gains taxes and reposition investment portfolios.

Common partnership-owned assets include:

  • Apartment communities
  • Retail centers
  • Office buildings
  • Industrial properties
  • Self-storage facilities
  • Land holdings

As with LLCs, the partnership itself generally must remain the taxpayer completing the exchange.

Why Partnerships Create Challenges

Partnership exchanges become complicated when owners want different outcomes.

Consider this scenario:

Three partners own a commercial property.

Upon sale:

  • One partner wants cash.
  • One partner wants a DST investment.
  • One partner wants to acquire another property directly.

Unfortunately, partnerships cannot simply split exchange proceeds after closing and expect everyone to receive tax deferral. The IRS generally views the partnership itself as the taxpayer. This often leads investors toward advanced planning strategies.

The “Drop and Swap” Strategy

One commonly discussed strategy is called a drop and swap.

Under this approach:

  1. The partnership distributes ownership interests to individual partners before the sale.
  2. Partners become direct property owners.
  3. Individual owners later complete separate exchanges.

The goal is to allow each owner to pursue independent investment objectives.

Example

ABC Partnership owns a $6 million retail property.

Before selling:

  • Partner A receives a direct tenancy-in-common interest.
  • Partner B receives a direct tenancy-in-common interest.
  • Partner C receives a direct tenancy-in-common interest.

After a sufficient holding period, each owner may pursue separate exchange strategies.

Potential outcomes:

  • Partner A acquires replacement property.
  • Partner B purchases a DST.
  • Partner C cashes out and pays taxes.

Why Drop and Swap Requires Caution

Drop and swap is not an IRS-approved shortcut. The IRS evaluates whether investors genuinely held the property for investment purposes. If ownership changes occur immediately before a sale, the IRS may challenge the transaction.

Questions often include:

  • Was the transfer legitimate?
  • Was the ownership change merely tax-motivated?
  • Was there sufficient investment intent?
  • How long was the new ownership structure maintained?

Improper execution can potentially invalidate tax deferral. For this reason, investors should involve qualified tax and legal advisors long before listing property for sale.

The “Swap and Drop” Strategy

Another strategy sometimes discussed is swap and drop.

In this scenario:

  1. The partnership completes the exchange.
  2. Replacement property is acquired.
  3. Ownership interests are later restructured.

Again, timing and facts matter significantly. There is no universal safe harbor that guarantees IRS approval. Professional guidance is essential.

Tenancy-in-Common Ownership and 1031 Exchanges

Some investors hold property as tenants in common (TIC). Under a TIC structure, each owner holds a direct fractional interest in the property. Unlike a partnership, each owner may generally perform an independent exchange.

Example

Four investors each own 25% of a property as tenants in common.

After a sale:

  • Investor 1 purchases industrial property.
  • Investor 2 acquires a DST.
  • Investor 3 purchases multifamily property.
  • Investor 4 cashes out.

Each owner controls their own exchange decisions. This flexibility is one reason TIC ownership remains attractive in certain situations.

Can an LLC Buy a DST in a 1031 Exchange?

Yes. An LLC can generally acquire a Delaware Statutory Trust (DST) interest as replacement property.

This is increasingly common among:

  • Retiring landlords
  • Passive investors
  • Estate planning investors
  • Investors seeking diversification

DSTs qualify as like-kind real estate under IRS Revenue Ruling 2004-86. As long as ownership continuity requirements are satisfied, an LLC-owned property can often exchange into a DST structure.

Can a Partnership Buy a DST?

Yes. Partnerships may also utilize DSTs as replacement property.

Advantages may include:

  • Passive ownership
  • Institutional-quality assets
  • Professional management
  • Diversification opportunities
  • Debt replacement solutions

The partnership itself typically remains the taxpayer acquiring the DST interest.

Common LLC and Partnership Exchange Mistakes

Changing Ownership During the Exchange

Changing ownership percentages while an exchange is underway can create compliance issues.

Distributing Proceeds After Closing

Many investors mistakenly believe they can divide proceeds and let individual owners exchange separately.

This frequently creates taxable events.

Waiting Too Long to Plan

Ownership issues often require months of planning.

Starting discussions after entering escrow may limit available options.

Ignoring State-Specific Rules

State tax laws may introduce additional considerations beyond federal requirements.

Assuming an LLC Automatically Qualifies

An LLC does not automatically guarantee exchange eligibility.

Ownership structure still matters.

Example: LLC Completing a Successful Exchange

Scenario

Property Value: $2.5 million

Ownership: Single-member LLC

The LLC sells a rental property and exchanges into a larger multifamily asset.

Because:

  • Ownership remains unchanged
  • The taxpayer remains the same
  • All exchange proceeds are reinvested

the transaction may qualify for full tax deferral.

Example: Partnership Ownership Problem

Scenario

Three partners own an office building.

After a sale:

  • Partner A wants another investment property.
  • Partner B wants a DST.
  • Partner C wants cash.

Because the partnership is the taxpayer, simply splitting proceeds after closing may create taxable consequences.

Advance planning may be necessary to explore alternative structures.

Estate Planning Considerations

Ownership structure can also influence estate planning outcomes.

Some investors use 1031 exchanges to:

  • Consolidate holdings
  • Simplify management
  • Transition into DSTs
  • Improve inheritance planning

When replacement property is held until death, heirs generally receive a step-up in basis under current tax law. This can significantly reduce or eliminate deferred capital gains taxes. Investors should coordinate exchange planning with broader estate planning objectives.

When to Start Planning

For LLCs and partnerships, planning should ideally begin before a property is listed for sale. Waiting until escrow often limits flexibility.

Investors should evaluate:

  • Ownership structure
  • Partner objectives
  • Entity tax treatment
  • Exit strategies
  • Replacement property goals

The earlier discussions occur, the more options are typically available.

Frequently Asked Questions

Can an LLC perform a 1031 exchange?

Yes. Both single-member and multi-member LLCs can generally complete 1031 exchanges when ownership continuity requirements are satisfied.

Can a partnership do a 1031 exchange?

Yes. Partnerships frequently utilize 1031 exchanges to defer taxes and acquire replacement property.

Can individual partners complete separate exchanges?

Not automatically. The partnership is generally considered the taxpayer, which creates planning challenges when owners want different outcomes.

What is a drop and swap?

A drop and swap is a strategy where partnership ownership is distributed before a sale so owners may potentially pursue separate exchange strategies.

Is drop and swap IRS approved?

There is no blanket IRS approval. These strategies require careful planning and professional guidance.

Can an LLC buy a DST?

Yes. An LLC can generally acquire a Delaware Statutory Trust interest as replacement property.

Can a partnership invest in a DST?

Yes. Partnerships frequently use DSTs for passive ownership and diversification.

Does changing ownership during an exchange create problems?

Potentially. Ownership changes can jeopardize exchange eligibility if not structured properly.

Can family members jointly complete a 1031 exchange?

Yes, but ownership structure and related-party rules should be reviewed carefully with qualified advisors.

What is the biggest mistake LLC owners make?

Waiting until the property is under contract before addressing ownership and exchange planning issues.

Can a partnership dissolve before a 1031 exchange?

Possibly, but timing and structure matter significantly. Professional tax and legal guidance should be obtained before making ownership changes.

Should LLC and partnership owners consult advisors before selling?

Absolutely. Ownership structure issues are among the most common reasons exchanges become complicated or fail to achieve intended tax outcomes.

Ready to Structure Your Exchange Correctly?

Ownership structure can determine whether a 1031 exchange succeeds or creates unexpected tax consequences.

IPA 1031 Group helps investors evaluate replacement property options, including DST investments, passive real estate strategies and exchange solutions designed to align with long-term investment goals.

Whether you own property individually, through an LLC or as part of a partnership, our team can help you explore replacement property options before critical exchange deadlines begin.