Madison Title Agency | Madison 1031 | LeaseProbe/Real Diligence | Madison SPECS

Question submitted by an attorney at a law firm in New York, NY to the Madison 1031 team:
Upon receipt by the 1031 Agent [Qualified Intermediary] of the down payment ($1m) from the Buyer in December 2017 on its contract ($13,200,000.00) to purchase Sellers’ relinquished property -- closing scheduled for  May 2018 --  and prior to identifying the replacement property -- with the specific authorization in writing of the Buyer -- can the 1031 Agent release a portion of the down payment without jeopardizing the entire 1031 process for the balance of the down payment and the balance due from Buyer in the amount $12M to apply towards the purchase of replacement property within the proper guidelines?

Reply by Lee David Medinets, Esq., Chief Counsel, Madison 1031
Generally speaking, 1031 exchange funds can only be used for the purpose of acquiring a properly-identified replacement property.  Therefore, we could not issue a deposit check for a property that has not yet been identified.


Question submitted by an attorney in New Jersey to the Madison 1031 team:
Can an LLC who sold a property and purchased a property using a 1031 exchange change the LLC name?  Does this have to be done after the transaction has concluded and recorded or can this be done prior to purchase?

Reply by Lee David Medinets, Esq., Chief Counsel, Madison 1031
There is no problem in changing the name of an existing LLC before, during or after the exchange.  Replacement property must be acquired by the same taxpayer as the one who sold the relinquished property.  However, changing the name of an existing entity does not change its identity for federal tax purposes.  The company would continue to use the same Employer Identification Number (or Social Security Number in the case of most single-member LLCs owned by an individual). 

Let’s take this issue a step further.  Nearly all commercial lenders will want the replacement property to be acquired in the name of a new single purpose entity.  That is, a company that never did any other business (other than owning the replacement property) and that will not do any other business so long as the loan is outstanding.  The usual way to satisfy this lending requirement is for the taxpayer who sold the relinquished property to form a new LLC that will be solely owned by that taxpayer.  An LLC with only one owner that has not elected to be taxed as a corporation is a “disregarded entity.”  That is, it is entirely ignored as being an entity apart from its owner for federal income tax purposes, so that the assets that it owns are treated as belonging to the owner of the LLC.  The IRS is perfectly serious about completely disregarding single member LLCs for income tax purposes.  For example, we routinely transfer ownership of replacement property in reverse exchanges by transferring the LLC that holds title to that property.