Family Entities 1031 Planning: LLC and Trust Structures That Keep Exchanges Open

Title decides the taxpayer: what each family wrapper means for a later exchange

Every later question, who can exchange, who inherits what basis, who signs, follows from how title is held today. Pick the wrapper for the exit you expect, not the one that was easiest to set up.

• Revocable living trust: a grantor trust under §676, disregarded, so the individual exchanges and the trust's property resets at death under §1014(b)(2).
• Single-member LLC: disregarded under Reg. §301.7701-3(b)(1); its owner is the exchanger and can hold a TIC share through it.
• Multi-member LLC or limited partnership: a partnership by default; the entity exchanges, and members cannot exchange their units because units are not real property.
• Irrevocable non-grantor trust: its own taxpayer; the trustee exchanges, and there is no reset at the grantor's death if the assets sit outside the estate (Rev. Rul. 2023-2).
• Tenants in common: each owner exchanges their undivided share; with a §761(a) election, §1031(e) treats any partnership interest as an interest in the assets themselves.

The design that keeps everyone's options open: TIC shares held through each member's own disregarded LLC

Rev. Proc. 2002-22 lets each co-owner hold title directly or through a disregarded entity, so a family can give each branch its own single-member LLC that owns an undivided share of the farm or building. Each branch then has liability separation, can sell or exchange its share on its own timetable, and reports its rent on its own return.

To stay a co-ownership rather than a partnership, the group must not file a partnership return, must keep each owner's right to transfer, partition and encumber their share, must approve sales, leases and blanket loans unanimously, and must limit activity to customary maintenance and repair. A co-ownership agreement can add a right of first offer at fair market value so a departing branch is bought out inside the family.

Where the family wants the arrangement excluded from partnership rules outright, §761(a) and Reg. §1.761-2(a)(2) allow an election for co-owners who hold for investment, reserve the right to dispose of their shares separately, and do not authorize anyone to buy, sell or exchange for more than a year. The election is a statement filed with a Form 1065 for the first year, and §1031(e) then treats each interest as an interest in the land.

If the family keeps an LLC: operating-agreement terms and the seven-year clocks that decide whether a member can leave tax-free

An LLC suits a family that manages actively or wants one bank loan, but the operating agreement should say that the LLC may distribute undivided interests in kind, that a member may elect property rather than cash on exit, and who can sign exchange documents. Chase v. Commissioner shows what an agreement providing that no limited partner may 'demand or receive property other than cash' does to a member who later wants out: the partnership stayed the seller and the member got only a distributive share of proceeds.

Distributions of property are generally tax-free under §731(a)(1), and §732 sets the member's basis in what comes out, but property contributed within the last seven years is different: §704(c)(1)(B) taxes the contributor if that property goes to another member inside seven years, while §737 catches a contributor who pulls other property out inside the same window. Contribute early, or hold newly contributed parcels until the clock runs, before planning a member's exit through a distribution.

Magneson and Bolker, both Ninth Circuit decisions, allowed an exchange immediately followed by a contribution to a partnership and a liquidation immediately followed by an exchange, treating each as a continuation of the investment. They help, but they bind one circuit and the IRS asks about both moves on Form 1065 Schedule B, so a family should not plan on same-day steps.

Basis for heirs inside an entity: §754 elections, valuation discounts and the §732(b) fallback

When a member dies, §1014 resets the value of the LLC interest, but §743(a) leaves the LLC's own basis in the land unchanged unless a §754 election is in effect. Without it, the LLC's later sale allocates the old gain to the heir's K-1 even though the heir's interest was reset.

Hypothetical: a four-member farm LLC holds $4,000,000 of land with an $800,000 basis, and one parent dies holding 25% valued at $1,000,000. With a §754 election, §743(b) adds $800,000 of inside basis for the heir's share, so a sale at $4,000,000 produces no gain on that quarter; without it, the heir is allocated $800,000 of gain on the K-1, and the mismatch stays trapped until the interest is liquidated, when §732(b) gives the distributed property the heir's outside basis.

Two cautions: if the estate valued the 25% interest at a discount for lack of control or marketability, the heir's basis is the discounted figure under §1014(f), and Schedule B question 10a asks each year whether a §754 election is in effect, so adopt it before the first death rather than after.

Farm and ranch specifics: §2032A special-use valuation, its ten-year recapture and how exchanges tack

An executor can elect §2032A so qualifying farmland is valued as a working farm instead of at development prices, and Rev. Proc. 2025-32 caps the 2026 reduction at $1,460,000. The price is a recapture tax if a qualified heir sells outside the family or ends the farming use within ten years of the death.

Section 2032A contemplates exchanges: the National Agricultural Law Center's review of the statute notes that ownership and use periods can tack across a §1031 exchange under §2032A(e)(14), before and after death, so a family can reposition land without automatically losing the election. The mechanics are exacting, and the farm and ranch guide covers exchanges of working land in depth.

Equipment, livestock and crops are not real property for §1031 and pass through the entity on their own rules; the farmland property page separates what is exchangeable from what is not.

Governance and records that make the next exchange and the next estate administration routine

Restructuring is cheapest when nothing is for sale. A family that intends to sell or split within a few years should make the drop, the election or the retitling now, so the record shows a change in ownership that stood on its own before any offer, which is the distinction Chase turned on.

• Separate bank accounts and books for each entity or co-owner, with rent and expenses split by ownership share.
• Annual minutes or consents recording who approved leases, loans and any plan to sell, dated well before a buyer appears.
• Depreciation schedules and exchange files kept by asset, since each exchange carries basis forward under §1031(d) and heirs need them for §1014(f).
• Form 1065 Schedule B answers reviewed every year: question 10a (§754 election), 11 (exchange property distributed or contributed) and 12 (undivided interests distributed).
• A calendar entry for the seventh anniversary of every contribution of property to the LLC.