Can an LLC Do a 1031 Exchange? Deadlines and Drop-and-Swap

Yes, an LLC can do a 1031 exchange, and real estate investors routinely use LLCs for exactly this purpose. What changes from one LLC to the next is how the exchange is structured, because the IRS’s tax classification of your LLC controls which name has to appear on the deed of the property sold and the deed of the property bought.¹ Everything else — the 45-day clock, the 180-day clock, the qualified intermediary, the reinvestment math — applies to your LLC the same way it applies to any other taxpayer.

Which Taxpayer Is Doing the Exchange

Section 1031 requires the same taxpayer to be on both sides of the exchange. For an LLC, “same taxpayer” means whatever the IRS treats the LLC as for federal income tax.

Single-Member LLC

A single-member LLC is a disregarded entity. The IRS looks through it and treats you and the LLC as one taxpayer.² That gives you room to move. You can sell in your personal name and buy in the LLC’s name, or sell through the LLC and buy personally, without breaking the same-taxpayer rule.

Multi-Member LLC

An LLC with two or more members defaults to partnership taxation unless it files Form 8832 to elect corporate treatment.³ A partnership is its own taxpayer, separate from its members. The LLC’s name has to be on both deeds. Individual members cannot peel off their share and run a personal exchange, because a membership interest is not real property and does not qualify under Section 1031.⁴ Every member has to be on board with the exchange, which is often where deals fall apart.

LLC Taxed as a Corporation

If your LLC elected S-corp or C-corp status, it is a corporation for federal tax purposes. The entity can exchange, but the corporate entity is the taxpayer on both deeds, and the deferred gain sits at the corporate level.

When Members Disagree: The Drop and Swap

The classic problem in a multi-member LLC is one member wanting to cash out while the others want to defer. Because partnership interests don’t qualify for 1031 treatment and the LLC has to move as a single taxpayer, practitioners use a “drop and swap.”

The LLC distributes the property to its members as tenants in common, each receiving an undivided interest matching their membership share. Once title is held individually, each former member decides independently: exchange into new real estate, or sell and pay the tax.

The IRS watches these closely. The main risk is the step-transaction doctrine, under which the IRS collapses the distribution and the sale into a single event and calls it a sale of partnership interests, which does not qualify. There is no bright-line holding period. Two years as tenants in common is the period practitioners generally treat as safe. Shorter periods have survived in court where taxpayers showed genuine investment intent, but anything under a year invites a challenge, and converting and immediately selling is almost certain to lose. Form 1065 (Schedule B, Item 14) now asks whether the partnership distributed tenancy-in-common interests during the year, so the IRS sees these transactions when they happen.

What Property Your LLC Can Exchange

Since 2018, only real property qualifies. The Tax Cuts and Jobs Act stripped equipment, vehicles, artwork, and other personal property out of Section 1031.¹ Both sides of your LLC’s exchange must be real estate.

“Like-kind” is broader than most people expect. It refers to the nature of the property, not its grade or specific use. Your LLC can trade a warehouse for an apartment building, raw land for a retail center, or a rental house for a fractional interest in a larger property. Any real property held for productive use in business or for investment is generally like-kind to any other real property held for the same purpose.⁴

Property held primarily for sale is excluded. Fix-and-flip inventory does not qualify. The IRS looks at how your LLC actually used the property and what its books show, and courts have weighed factors like duration of ownership when the investment-use question is contested.⁵

The 45-Day and 180-Day Deadlines

Most exchanges are deferred, meaning the sale and the purchase don’t close on the same day. Two federal deadlines run from the moment your LLC transfers the relinquished property, and your LLC cannot extend either one on its own.

45 days to identify. Your LLC has 45 days from the transfer to identify potential replacement property in writing, signed and delivered to the qualified intermediary, using unambiguous descriptions such as a street address or legal parcel number.
180 days to close. Your LLC must close on the replacement property by the earlier of 180 days after the transfer or the due date, including extensions, of the LLC’s tax return for the year of the transfer.⁶

That second deadline surprises people. If your calendar-year LLC sells in January, its return due date can arrive before day 180. Filing an extension protects the full 180 days. Blowing either deadline collapses the exchange, and the entire realized gain becomes taxable in the year of sale. There is no grace period.

How Many Properties Your LLC Can Identify

Your LLC only needs to satisfy one of three identification rules:

Three-property rule. Identify up to three replacement properties, no cap on their combined value. This is the option most exchanges use.
200-percent rule. Identify any number of properties, as long as their combined fair market value does not exceed 200 percent of what the LLC sold. Sell for $1 million, identify up to $2 million.
95-percent rule. Identify any number at any value, but your LLC must acquire at least 95 percent of the total identified value. An all-or-nothing rule that rarely fits a routine exchange.⁶

Reinvest Everything, or Pay Tax on the Difference

A fully deferred exchange requires your LLC to reinvest all the net proceeds and take on equal or greater debt. Anything left over is “boot,” and boot is taxable up to the amount received. It does not blow up the exchange; it just creates a recognized gain.

Cash boot is what it sounds like. Sell for $1 million, buy for $900,000, and $100,000 is taxable. Non-real-property assets received in the exchange count the same way.

Mortgage boot is debt relief. If the old property carried a $400,000 mortgage and the new one carries $300,000, the $100,000 of debt reduction is boot. Your LLC can offset mortgage boot by putting additional cash into the closing. The working rule: trade equal or up in both equity and debt to keep the whole gain deferred.

Form 8824 asks your LLC to report cash received, the fair market value of any non-like-kind property, and net debt relief, and the form runs the math on how much gain is recognized now and how much rolls into the basis of the replacement.⁷

Your LLC Cannot Touch the Money

In a deferred exchange, your LLC cannot have actual or constructive receipt of the sale proceeds between closings. If it does, the IRS treats the whole thing as a sale.⁶ A qualified intermediary holds the funds in a segregated account and wires them to the closing agent for the replacement property.

The intermediary must sign a written exchange agreement with your LLC, take title to the relinquished property (on paper), and transfer the replacement property to the LLC. The agreement must expressly bar the LLC from receiving, pledging, borrowing against, or otherwise reaching the funds before closing.⁸

The regulations disqualify anyone who has served as your LLC’s employee, attorney, accountant, investment banker, or real estate agent within the two years before the exchange. Title companies, escrow companies, and financial institutions providing only routine services are excepted. Intermediary fees typically run from $800 to $1,500, more for complex exchanges.

Exchanges Between Related Parties

If your LLC exchanges with a related party, a two-year holding period attaches to both sides. If either party disposes of its property within two years, the deferral is revoked and the gain becomes taxable as of the disposition date.⁴

Related parties here include family (siblings, spouses, ancestors, lineal descendants) and entities with more than 50 percent common ownership. If your LLC buys replacement property from another LLC with the same majority owner, the two-year clock is running. Death of a party, involuntary conversion, and transactions where neither the exchange nor the later disposition had tax avoidance as a principal purpose are excluded from the recapture rule.

Reporting the Exchange

Your LLC reports the exchange on Form 8824, filed with its return for the year the relinquished property was transferred. The form asks for the LLC’s EIN, the dates the old property was acquired and transferred, the date the replacement was identified in writing, and the date it was received.⁹

Part III is the math: adjusted basis of the relinquished property, any boot, and the realized gain, split between the portion recognized now and the portion deferred into the basis of the replacement.⁷ If your LLC completed more than one exchange in the year, it can file a summary Form 8824 with a separate statement for each.

Keep the intermediary’s final accounting, both deeds, the written identification, and the exchange agreement. The replacement property’s basis depends on those numbers for as long as your LLC owns it, and an audit years later will be reconstructed from the LLC’s own file.

1
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
2
Internal Revenue Service. Single Member Limited Liability Companies
3
Internal Revenue Service. LLC Filing as a Corporation or Partnership
4
Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment
5
Justia. Bolker v. Commissioner of Internal Revenue, 760 F.2d 1039 (9th Cir. 1985)
6
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
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Internal Revenue Service. 2025 Instructions for Form 8824 – Like-Kind Exchanges
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Internal Revenue Service. Revenue Procedure 2003-39
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Internal Revenue Service. Form 8824 – Like-Kind Exchanges