The short answer
A transfer that does not change the taxpayer is safe. Deeding the property into a single-member LLC you own alone leaves it disregarded as an entity separate from its owner under Reg. §301.7701-3(b)(1), and a revocable living trust makes you the owner of the trust property under §676(a). A gift is a different question, because §1031(a)(1) requires that you received the property to hold for business or investment use and the Tax Court measures that intent as of the exchange. Wagensen kept his new ranch in his partnership's operations for more than nine months and the gift to his children stood; Click's children moved into the two houses on the day of the exchange, and the gift seven months later cost her the whole deferral.
At a glance
| Single-member LLC | Disregarded under Reg. §301.7701-3(b)(1), so the taxpayer for §1031 does not change |
|---|---|
| Revocable living trust | §676(a) treats the grantor as owner where the power to revest title is exercisable |
| Adding a member | Rev. Rul. 99-5: the LLC becomes a partnership; a sale of an interest triggers §1001 gain |
| Contribution instead of sale | Rev. Rul. 99-5 Situation 2: no gain to either party under §721(a) on a cash contribution |
| Gift basis | §1015(a): the donee takes your basis, deferred gain included, with a loss-basis exception |
| Basis at death | §1014: fair market value at death, which is what erases the deferred gain |
| Click v. Commissioner | 78 T.C. 225 (1982): denied where the children moved in at once and got deeds at 7 months |
| 2026 gift annual exclusion | $19,000 per donee (Rev. Proc. 2025-32 §3.42) |
Same taxpayer, new deed: the disregarded LLC and the revocable trust
Reg. §301.7701-3(b)(1) gives a domestic eligible entity with a single owner one default: it is disregarded as an entity separate from its owner unless it elects otherwise. Rent, depreciation and the exchange all stay on your return, so nothing about the exchange is disturbed.
A revocable living trust reaches the same place by a different route. §676(a) treats the grantor as the owner of any portion of a trust where the power to revest title in the grantor is exercisable by the grantor or a non-adverse party.
What still needs checking is outside the tax code: the lender's due-on-sale clause, the title policy endorsement and the state or local transfer tax on the deed. The wider framework is set out in same-taxpayer rules in 1031 exchanges and buying the replacement in a revocable trust.
Adding a second member converts the LLC and can be taxable on the spot
Rev. Rul. 99-5 sets out the two ways it happens, and they have opposite consequences. In Situation 1 an outsider buys half of the single member's interest; that purchase is treated as buying a 50 percent interest in each of the LLC's assets, and the seller recognises gain or loss under §1001 on the deemed sale before both parties are treated as contributing to a new partnership.
In Situation 2 the newcomer contributes cash to the LLC instead. Under §721(a) neither party recognises gain, the existing member is treated as contributing all the assets, and the newcomer's basis is the cash contributed.
Either way, from that day the partnership — not you — is the taxpayer that owns the real estate, which is what makes the next exchange complicated. That is the drop-and-swap problem in reverse; see can an LLC do a 1031 exchange and drop-and-swap strategies.
What actually sank Click, and it was not the seven months
In Click v. Commissioner the taxpayer exchanged a Virginia farm on 9 July 1974 for two residences plus cash and a note. Her two children and their families moved into the houses the same day, and she signed deeds of gift on 8 February 1975.
The Tax Court held the exchange failed because she “did not intend to hold the property received” for either qualifying purpose. The evidence was behavioural: the children carried the homeowner's insurance and paid the property taxes, one of them made substantial custom improvements without her approval and lived there rent free, and she was working through an estate plan with her attorney while the exchange was being negotiated.
The court also made a point worth remembering for family planning. Had she deeded part of the farm to the children first and let them exchange investment farmland for houses they intended to live in, the children would not have qualified either.
What Wagensen did differently across more than nine months
In Wagensen v. Commissioner the taxpayer took title to the Napier Ranch on 18 January 1974 and conveyed halves to his son and daughter on 8 November 1974. The ranch was used by the cattle partnership he ran with his son throughout that period and continued to be used by it afterwards.
The sequence of advice mattered. He did not raise the income and gift tax consequences of a transfer with his accountants until after the deed to the ranch was in hand, and the court found the exchange was in no sense part of the gift transaction.
Its formulation is the one to hold on to: a “general desire… eventually to transfer his property to his children, is not inconsistent with his intent at that time to hold the ranch for productive use in business or for investment.” The court also refused to penalise the order of events, saying that a gift made after the exchange rather than before it would exalt form over substance.
What a gift does to the numbers, and what waiting does instead
§1015(a) gives the donee the same basis the property had in your hands, subject to the rule that for determining loss the basis cannot exceed fair market value at the time of the gift. Everything the exchange deferred travels with the deed.
Take a hypothetical replacement worth $1,200,000 with a substituted basis of $250,000. Gift it and your child inherits a $950,000 built-in gain and your depreciation schedule. Hold it and §1014 resets basis to value at your death, which is the only mechanism that removes the deferred gain outright — see swap till you drop planning.
Fractional gifting has its own arithmetic. For calendar 2026 the first $19,000 of gifts to any one person is outside taxable gifts under Rev. Proc. 2025-32, so a programme of undivided interests is a gift tax filing exercise as well as a §1031 one. Put the transfer in front of your CPA or attorney, and your estate attorney, before the deed is recorded.
If the plan is family, the cleaner sequence is before the sale
Both cases point the same way: the questions an examiner asks are about what happened before and immediately after the exchange, and the entity structure is far easier to set correctly while the relinquished property is still unsold. That is the argument for designing family LLC and trust structures in advance and for a pre-sale checklist.
Where the real objective is to leave something heirs can divide, a fractional interest in a building is an awkward asset and a beneficial interest in a trust is not. We place exchange equity with vetted national sponsors inside a regulated broker-dealer framework, and splitting Delaware Statutory Trust interests among children is the structure exchangers ask about most at this stage — see using DSTs to simplify inheritance.
Whatever the vehicle, keep the rental record going in the meantime. A lease, a rent ledger and a Schedule E for the period between the exchange and the transfer are the facts that decided both cases.
Related questions
Is there a waiting period before I am allowed to gift?
No statute sets one. The evidence of use between the exchange and the gift is what decides it — see how long to hold the replacement.
Does moving it into an irrevocable trust change the taxpayer?
It depends on the trust. A grantor trust leaves you as owner for income tax; a non-grantor irrevocable trust is a separate taxpayer filing its own Form 1041, and the transfer is a completed gift.
Can I add my spouse to the deed straight away?
Spouses raise their own set of questions, including community property and joint filing status; see adding or removing a spouse on title.
Do my children get a step-up if I gift the property now?
No. §1015 carries your basis over; only §1014 at death resets it. Gifting now moves the deferred gain rather than removing it.
What about deeding it into a family LLC in which my children are members?
The contribution itself is generally covered by §721(a), but the LLC becomes a partnership under Rev. Rul. 99-5 and the held-for-investment question is the same one Click and Wagensen answered.
Sources
Checked against these publications on September 19, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Click v. Commissioner, 78 T.C. 225 (1982)
- Wagensen v. Commissioner, 74 T.C. 653 (1980)
- Rev. Rul. 99-5, single-member LLC becoming a partnership
- 26 CFR §301.7701-3, classification of eligible entities
- 26 U.S.C. §676, power to revoke
- 26 U.S.C. §1015, basis of property acquired by gift
- Rev. Proc. 2025-32, 2026 inflation adjustments