1031 Exchange, Drop and Swap, LLC, and other structures

Wally Smith:
If you have LLC with multiple members of it, and then they wanted to, they thought, well, we really would like to go our own separate ways. How does that work? What’s the mechanics of that? Can you touch on that a little bit?

Jeff Hertz:
Sure. There’s a lot of different structures that people will own assets in, as you said an llc, different corporations, different partnerships. Ideally people would own real estate as tenants in common, because that gives you the most flexibility from what I’ve seen, the ability to dissolve the TIC and individual participants go in their own direction. I guess I would say, obviously having a good tax and or legal advisor can be enormously helpful. I joke sometimes when I get questions saying, well, this investor’s in a C corp and they need to unwind this, and they’re asking me. And I said, well, I am not a tax professional. I don’t give tax advice. And you’re talking about-

Wally Smith:
That should probably be a disclosure as well, we’re not giving tax or legal advice on the show today.

Jeff Hertz:
And in many cases you’re talking about assets that have a seven, eight figure valuation to them. So you want to make sure just as in all business decisions that you have good qualified people. One such structure known as a drop and swap can be very helpful, where effectively you dissolve the entity that the owners were part of, and you’re able to portion out the individual pieces pro rata to the investors, and then they can go and make their own decision. Because again, what happens in a lot of partnerships for example, 20 years ago everybody was healthy and well and happy together. And then over the last 20 years, people have passed away. So now you have multi-generational considerations, you have liquidity considerations.
There’s a lot of activities that a good attorney/CPA can help you unwind. And one of the things that I recommend is make sure you’ve addressed those structural issues before you get too far down the path of actually disposing of the property. Because again, I had a personal situation where we had to restructure a corporation and then our attorney suggested that we wait a period of time to let the dust settle.

Wally Smith:
Do you find that, again, without giving tax advice, just in your experience, how far in advance of an exchange have you seen the drop and swap be implemented?

Jeff Hertz:
I’ve heard it said maybe jokingly, maybe this is more realistic, it depends on where, how should we say, on the coast, there’s certain places where people would say, boy, you can do one and then walk right into the next transaction the next day. There are some people who would say straddling a tax year might be a good, that way the paper trail is a little bit, we did one transaction one year and another transaction in another year. As you mentioned earlier, there aren’t a lot of bright lines with some of these aspects with the IRS. It’s really more of the investor and their advisors mentality as far as how comfortable they are with that.

Wally Smith:
Very good. Well we have resources that are available if somebody wants to learn more about drop and swap or the other way swap and drop. These are tools that are not, you don’t generally want to go in and tell the IRS, hey, what’s the best way to do my drop and swap? That’s not how that works. That’s lingo for the planners on the front side.