Yes. For an exchange to satisfy Section 1031, the taxpayer that will hold the title to the replacement property must be the same taxpayer that held title to the relinquished property. However, business considerations, liability issues, and lender requirements may make it difficult for the exchanger to keep the same vesting on the replacement property. Exchangers must anticipate these vesting issues as part of their advanced planning for the exchange.
There are some exceptions to this rule when dealing with entities that are disregarded for federal income tax purposes. For example, the following changes in vesting usually do not destroy the integrity of the exchange:
The exchanger’s revocable living trust or other grantor trust may acquire a replacement property in the name of the exchanger individually, as long as the trust entity is disregarded for federal tax purposes.
The exchanger’s estate may complete the exchange after the exchanger dies following the close of the sale of relinquished property.
The exchanger may sell a relinquished property held individually and acquire a replacement property titled in a single-member LLC or acquire multiple replacement properties in different single-member LLCs as long as the exchanger is the sole member and the single member LLCs are treated as disregarded entities.
A husband and wife may exchange a relinquished property held individually as community property for a replacement property titled in a two-member LLC in which the husband’s and wife’s ownership is community property, but only in community property states and only if they treat the LLC as a disregarded entity.
As a general rule, the exchanger should not make any changes in the vesting of the relinquished or replacement properties prior to or during the exchange. Exchangers are cautioned to consult with their tax or legal advisors regarding how their vesting issues will impact the structure of their exchange before they transfer a relinquished property.