A single member limited liability company (LLC) may
be a desirable form of ownership for both real property and
tenants-in-common interests. In most cases, a LLC will limit an
investor's exposure to creditors and litigants to the equity in the
property and thereby shield personal assets. Consequently, lenders
will often insist on a loan covenant requiring that a property be held
in a limited liability entity.
An LLC is a pass-through entity for federal and state
income tax purposes with no tax at the entity level and net income
passing through the entity to the owner's tax return (schedule E for
individuals). The single member LLC in not disqualified as one of
the enumerated exclusions in IRC §1031(a)(2), as is a partnership,
because the single member LLC is disregarded by the IRS as an entity
separate from the taxpayer. Other pass-through entities which are
disregarded by the IRS are a Massachusetts nominee trust, a Delaware
business trust, an Illinois land trust, and grantor trust. Please
note that not all states allow single member LLC's.
(or disregarded entity) is one of the few exceptions to the rule that
the same taxpayer entity that sells the relinquished property must
also be the same entity to purchase the replacement property.
The exception, found in Treasury Reg.
§301.7701-(3)(b)(1), allows the single member LLC that takes title to
the property to be ignored for tax purposes and teats the individual
or entity owning the LLC as the direct owner. Furthermore, in
Letter Ruling 200131014, a taxpayer acquired title to replacement
property and then deeded the property over to a single member LLC in
which the taxpayer was the sole member.
entity may elect a classification change by filing Form 8832 under
"the check the box" rules. Accordingly, an entity with only one
owner may elect to be treated as either a disregarded entity or as a
corporation and an entity with two or more owners may be classified
either as a partnership or as a corporation. If no election is
made the single member entity will automatically be treated as a
disregarded entity. Thus, a taxpayer may take title to
replacement property in the form of an LLC to satisfy loan
requirements and not be in danger of the exchange being disqualified
for section 1031 treatment. A classification election may be
effective up to 75 days prior to, or 12 months after the date the
election is filed. An additional election may not be made within
60 months of the effective date of the previous election.
member LLC was permitted to receive title replacement property and
enjoy a tax deferred exchange when the taxpayer and the taxpayer's
wholly owned corporation were the two members of the LLC. In
this case, the lender was a Board member of the corporation in order
to protect the lender's interest by preventing the corporation from
ever filing for bankruptcy. The IRS disregarded the two member
LLC similar to a single member entity and noted that the corporation
did not have rights or risks regarding profits, losses or management
of the LLC.
For more information on this matter or if we
may be of further assistance please contact us for a free consultation
by calling us at 1 (800) 781-1031
or (714) 939-1031 or
by e-mail at
Security investments offered
through Sandlapper Securities, LLC. (Member FINRA, SIPC)