A disregarded entity in a 1031 exchange refers to a type of business structure that is treated as a separate entity for tax purposes but is ignored for legal and operational purposes. Examples of disregarded entities include single-member limited liability companies (LLCs) and certain types of trusts.
Key-Takeaway
- Disregarded entities in a 1031 exchange include single-member LLCs and certain types of trusts.
- The use of disregarded entities can make a 1031 exchange impossible or trigger taxable events
Example
A taxpayer wants to sell their rental property and use a 1031 exchange to defer capital gains tax. However, the property is held in a single-member LLC, which is considered a disregarded entity. In this case, the taxpayer cannot complete a 1031 exchange with the LLC as the transferor or recipient of the replacement property.
Tips
- Before completing a 1031 exchange, carefully review the type of entity holding the property to ensure it is not a disregarded entity.
- Consider restructuring ownership or finding alternative replacement properties that are not held in disregarded entities.
Recommendations
- Consult with a tax professional and real estate attorney to ensure compliance with 1031 exchange regulations and avoid any issues related to disregarded entities.
- Be proactive in identifying and addressing any potential disregarded entity issues before completing a 1031 exchange.
