THE WAY YOU COME OUT OF TITLE IS THE WAY YOU NEED TO GO BACK INTO TITLE

Although it is not explicitly stated in Section "1031" of the Internal Revenue Code, the same taxpayer that disposes of the Relinquished Property must acquire the Replacement Property in order to have a successful "Deferred Exchange" transaction. Internal Revenue Code Section 1031(a)(3) provides that property received by the "taxpayer" (seller) will not be like-kind unless identified within 45 days (known as the Identification Period) of the date on which the "taxpayer" transfers the relinquished property in the Exchangeand received within 180 days after the date (known as the ExchangePeriod) on which the taxpayer transfers the relinquished property in the Exchange. 

SPOUSES

If the relinquished property is held by a husband and wife as tenants in the entirety or as community property, the replacement property should also be held in the same manner. In a private letter ruling, a husband and wife held involuntarily converted property as tenants in the entirety and the replacement property was acquired solely in the husband's name. The IRS ruled that because the wife was not named on the deed to the replacement property, she must report 50% of the gain on the sale of the property. If the relinquished property is held as a spouse's separate property, the replacement property should also be held as his or her separate property. A gift of the replacement property can be made later tax free under Internal Revenue Code Section "1031" after the Exchangeis "old and cold".

Often, lenders on the replacement property may require both spouses to be on title and to sign on the loan even though the relinquished property was held as the separate property of the spouse. In such a case, the spouses should have a written agreement that the co-signing spouse is doing so in trust for the other spouse and the character of the replacement property is separate property of the other spouse and no gift has occurred. 

GRANTOR TRUSTS 

A taxpayer may desire to acquire his or her replacement property in a revocable living trust or "grantor" trust for estate planning reasons. Alternatively, the taxpayer who has held his or her relinquished property in a revocable living trust or grantor trust may desire to hold the replacement property outside the trust. Either of these changes in ownership will not disallow Exchangetreatment under Internal Revenue Code Section "1031". Revocable living trusts or other "grantor" trusts under Internal Revenue Code Section "671-678"are not considered separate entities for federal tax purposes. The taxpayer will usually use his or her own tax identification number and not file a sperate tax return for the trust. 

The grantor, not the trust, is the "taxpayer" for purposes of Internal Revenue Code Section 1031. A taxpayer may also transfer the relinquished property to a grantor trust immediately prior to the Exchange, or transfer the replacement property to a grantor trust immediately after the Exchange. Care should be taken, however, to avoid terminating grantor trust status during or immediately before or after the Exchangebecause such termination results, in effect, in a transfer to a new taxpayer. 

Partnerships and Limited Liability Companies 

If a partnership is the owner of the relinquished property at the time of the Exchange, then the same partnership must acquire the replacement property in the Exchange. The partnership may want to convert from a general partnership to a limited partnership or a limited liability company during the Exchangeperiod so that the replacement property is acquired in the name of the limited partnership or limited liability company for additional liability protection for the partners. The conversion should not disallow the Exchange. The conversion of a general partnership to a limited partnership, or a partnership to a limited liability company does not cause a termination of the partnership and does not cause the partnership taxable year to close. The resulting limited partnership or limited liability company does not need to obtain a new tax identification number. These rules apply even if the limited liability company is formed in a different state than the partnership. A change in the partners' share of liabilities as a result of the conversion may trigger gain to a partner whose share of liabilities or at risk basis is reduced. The ownership of the partnership may change during the Exchangeperiod provided the changes do not result in a termination under IRC Section 708(b)(1)(B) if 50% or more of interests in partnership capital and profits is sold or Exchanged within a 12-month period. A disposition of a partnership interest by gift, bequest, or inheritance, or liquidation of a partnership interest, is not a sale or Exchangefor purposes of IRC Section 708(b)(1)(B). Therefore one partner may buy another partner out provided the transferor partner does not own 50% or more of the capital and profits interest in the partnership. Likewise, a new partner may be admitted to the partnership without a termination if the new partner contributes capital or services under IRC Section 721. IRC Section 708(b)(2) also provides special rules for mergers and divisions of partnership that do not result in partnership terminations. 

Single Member Limited Liability Companies 

Many states have laws that allow single member limited liability companies. The taxpayer can elect to have a single member limited liability company be taxed as either a sole proprietorship or a corporation for federal tax purposes. If the taxpayer elects taxation as sole proprietorship, then the taxpayer could hold the relinquished property as an individual and the replacement property as a single member limited liability company in a Exchange. This would allow the taxpayer the benefit of the liability protection of a limited liability company. It allows the taxpayer to satisfy the "single asset entity" requirements that many lenders impose on the replacement property. The IRS has approved the use of a single member limited liability company for the replacement property in an Exchange. 

Corporations 

If a corporation owns the relinquished property at the time of the Exchange, the corporation, and not its shareholders, must acquire the replacement property. Similarly,  if the shareholders own the relinquished property at the time of the Exchange, the corporation cannot acquire the replacement property because it is a different taxpayer. If the corporation undergoes a merger or other tax free reorganization during the Exchangeperiod, however, the successor corporation may acquire replacement property because there is a carryover of Internal Revenue code Section "1031" attributes following a reorganization. Changes in the ownership of the stock of a corporation during the Exchangeperiod should not affect the Exchangebecause the corporation remains a separate entity for tax purposes.