Section 1031 & Section 761

[smulekar]

A LLC member cannot use 1031 exchange rules to defer gain in a LIke Kind Exchange. However, if teh LLC makes a valid election under section 761 (A) to be excluded from the application of all of subchapter K, then each LLC member can use 1031 exchange.

My questions are:
1. How does one make the 761 election?

2. After making the 761 election - do we prepare a seperate return for each member? or do we prepare LLC return & issue Sch. K to each member?

[Bees Knees]

An LLC cannot elect out of partnership treatment under section 761 if the LLC is a trade or business. Section 761 is for investment clubs that don't want to hassle with filing the 1065. Section 761(a)(1) is quite clear that the election does not apply to a trade or business.

[S T]

Husband and wife own rental property as hw/jt with right of survivorship. Trying to complete a 1031 transaction.

1. Do h/w acquire replacement property as same titling hw jt w/right of survivorship, or can they change to an LLC during escrow or can they change and place new replacement property in LLC for liability protection after the close of escrow.

2. If replacement property is acquired or later changed to LLC, (h/w as members) can LLC qualify for a 1031 exchange later or is 1031 prohibited.

Sandy

[Bees Knees]

The prohibition on partnerships and Section 1031 means an interest in a partnership cannot be exchanged and receive 1031 treatment. That does not prevent a partnership from exchanging partnership assets under a 1031 exchange.

In the case of a partnership owning rental property, I don’t see any problem with the partnership exchanging the property with another rental property under section 1031, so long as the same partnership with the same partners owns the new rental property in the same manner they owned the old rental property. In other words, you can’t reallocate a partners ownership percentage because then that would be considered a partial exchange of a partnership interest.

As to a husband and wife owning rental property, the mere act of owning jointly owned investment property is not necessarily a partnership. Partnership treatment would not be required until services are performed that would make it a trade or business. So I think in your case, you are pretty much free to do it anyway you want. But probably to make it easier to title, I would leave the LLC out of the picture until after the exchange and the new property is jointly owned by husband and wife free and clear.