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Property Held in Entity

Exchanging Property Held In An Entity

Partnerships interests, corporate stock, and limited liability interests are not qualified property and cannot qualify for tax deferral if exchanged.

If you and all other owners of the entity want to exchange property for other like-kind property, there is no problem. The exchange occurs at the entity level. The asset owned by the company is exchanged; no exchange of the ownership interest occurs.

Property held in entity

If all the owners of the company do not want to exchange, you will need to transfer title to the asset to be exchanged into the individual names of the partners or stockholders dividing ownership among the owners. Before removing an asset from the company, you should consult with your accountant to make certain that the removal will not trigger taxation.

After transfer of the asset to the company owners, they can sell and pay the tax from any gain or exchange the interest under Section 1031.  If there is no business reason for transferring an asset into the owners of the company, other than the avoidance of taxation, the exchange may be challenged.

The longer the time between transfer of an asset into the entity owners and the exchange, the less likely the exchange will be challenged.