Can You Use a 1031 Exchange to Buy Into — or Buy Out — an LLC That Owns Real Estate Without Having to Drop and Swap?
A Smarter Alternative to the Drop-and-Swap? Understanding Revenue Rulings 99-5 & 99-6. Surprisingly, under certain IRS rulings, the answer may be yes. Revenue Rulings 99-5 and 99-6 create little-known planning opportunities involving LLCs, partnership interests, and investment properties — but the rules are highly technical and mistakes can be extremely costly. In this article, we break down how these strategies work, common pitfalls involving family partnerships and related-party rules, and why careful planning is essential for Newport Beach and Costa Mesa real estate investors navigating LLC ownership, 1031 exchanges, and capital gains planning.
For many real estate investors in Newport Beach, Costa Mesa, and throughout coastal Orange County, LLC ownership has become the norm.
And for good reason.
LLCs can provide:
- Liability protection
- Privacy
- Easier management between family members or investment partners
- Flexible estate planning opportunities
- Confidential ownership structures for high-profile individuals and families
But then comes the big question:
“Can I still do a 1031 exchange if the property is owned in an LLC?”
And the answer is…
Sometimes yes. Sometimes absolutely not. And sometimes… surprisingly yes because of two obscure IRS rulings known as Revenue Ruling 99-5 and Revenue Ruling 99-6.
These rulings have created some of the most fascinating — and misunderstood — planning opportunities in the real estate world.
For additional discussion on partnership structures and exchange planning, including traditional “drop and swap” considerations, see our related articles: Can You 1031 Exchange Out of a Limited Partnership? and Can You 1031 Exchange Out of an LLC?.At Lucas Real Estate Group, we regularly help clients navigate the overlap between real estate sales, LLC structures, investment strategy, and tax-sensitive transactions throughout Newport Beach, Eastside Costa Mesa, Corona del Mar, Newport Coast, and surrounding Orange County communities.
Led by Devin R. Lucas, our team combines real estate brokerage expertise with real estate legal and tax knowledge — something especially important when dealing with partnership structures and 1031 exchange planning.
The Problem: Partnership Interests Normally Do NOT Qualify for 1031 Exchanges
Most investors know the basics of a 1031 exchange:
You sell investment real estate and defer capital gains taxes by purchasing replacement investment property.
But many investors do not realize that Internal Revenue Code Section 1031 specifically excludes:
Partnership interests.
That means:
If you own an interest in a multi-member LLC taxed as a partnership, the IRS generally views you as owning:
❌ A partnership interest
—not—
✔ Direct ownership of real estate
This becomes a huge issue when:
- Family members want to split up investments
- One partner wants cash while another wants to exchange
- A sibling buyout is contemplated
- A trust or estate wants to restructure ownership
- Investors want to partially cash out
And this is exactly where Revenue Rulings 99-5 and 99-6 come into play.
Many investors throughout Newport Beach, Costa Mesa, and Orange County are surprised to learn how difficult partnership and LLC exchanges can become. For a deeper dive into these issues, read our articles: 1031 Exchange Out of a Limited Partnership and Can You 1031 Exchange Out of an LLC?.Revenue Ruling 99-5: Buying INTO a Single-Member LLC
Revenue Ruling 99-5 addresses a very specific situation:
A single-member LLC owns real estate.
Because the LLC only has one owner, it is treated as a “disregarded entity” for federal tax purposes.
In simple terms:
The IRS treats the owner as directly owning the underlying real estate.
Then a second investor buys into the LLC.
Example
Imagine this:
Chris owns a rental duplex in Costa Mesa through a single-member LLC.
Reza wants to buy a 40% interest in the investment.
Under Revenue Ruling 99-5, the IRS treats this transaction as:
- Chris selling a 40% interest in the underlying real estate directly to Reza
- Chris and Reza immediately contributing their interests into a newly formed partnership LLC
That distinction matters enormously.
Because for tax purposes:
✔ Chris is treated as selling real estate
—not—
❌ selling a partnership interest
That means the transaction may qualify for 1031 exchange treatment.
Revenue Ruling 99-6: Buying OUT a Partner in an LLC
Revenue Ruling 99-6 is even more interesting.
This ruling applies when:
A multi-member LLC taxed as a partnership becomes a single-member LLC after one member buys out the others.
Example
Imagine two brothers own a fourplex in Newport Beach through an LLC:
- Brother A = 50%
- Brother B = 50%
Brother A sells another investment property and wants to use 1031 exchange proceeds to buy out Brother B.
Normally this would fail because:
❌ partnership interests do not qualify for 1031 exchanges
But Revenue Ruling 99-6 changes the analysis.
Under the ruling, the IRS treats the transaction as:
- The partnership liquidating and distributing the underlying real estate to both partners
- The purchasing brother acquiring the selling brother’s share of the real estate itself
That means the buyer may be treated as purchasing:
✔ real estate
instead of
❌ a partnership interest
And that can potentially qualify as replacement property in a 1031 exchange.
The HUGE Catch Most Investors Miss
Here’s where things become dangerous.
Revenue Ruling 99-6 only works properly in very specific circumstances.
Generally:
- The purchasing party must end up owning 100% of the LLC
- The LLC typically becomes a disregarded entity afterward
- The transaction structure matters enormously
- Timing matters
- Related-party rules matter
- Documentation matters
This is not a “DIY tax strategy.”
And unfortunately, many investors learn about these concepts from internet forums or partial advice without understanding the risks.
Related-Party Problems: Why Family Transactions Become Complicated
Many Orange County investment properties are owned by:
- Siblings
- Parents and children
- Family trusts
- Husband and wife partnerships
- Longtime friends
That creates another layer of complexity.
Section 1031(f) contains special rules for related-party exchanges.
The IRS pays close attention when:
- One family member cashes out
- Another family member keeps tax deferral
- Exchange funds are used to buy out relatives
The IRS may argue:
“This was really just a disguised cash-out transaction.”
That does not automatically mean the transaction fails.
But it absolutely means the structure needs careful review.
Why This Matters So Much in Newport Beach and Costa Mesa
These issues are becoming increasingly common in higher-value coastal California markets.
We regularly see situations involving:
- Multi-generational investment properties
- Longtime family-owned duplexes and fourplexes
- Appreciation far beyond original purchase price
- Significant built-in capital gains
- LLC structures created decades ago
- Families trying to unwind partnerships
- Trust and inheritance planning after death
- Children buying out siblings
- Investors repositioning into larger properties through 1031 exchanges
A fourplex purchased years ago in Costa Mesa or Newport Beach may now have millions of dollars in appreciation.
One wrong move can trigger:
- Capital gains taxes
- Depreciation recapture
- State taxes
- Partnership tax issues
- Failed exchanges
And once a transaction closes incorrectly, there may be no way to undo the damage.
The Importance of Proper Planning BEFORE the Sale
One of the biggest mistakes investors make is waiting too long.
They often contact advisors after:
- Escrow opens
- A PSA is signed
- Exchange deadlines begin
- Partnership negotiations are already underway
But with partnership and LLC exchanges, the planning frequently needs to happen before the sale process begins.
Sometimes months before.
Potential strategies may include:
- Ownership restructuring
- TIC analysis
- Drop-and-swap review
- Swap-and-drop planning
- Partnership divisions
- Installment structures
- Refinancing alternatives
- Partial exchange analysis
- Estate and trust planning coordination
Every situation is different.
Real Estate Knowledge + Legal & Tax Knowledge Matters
At Lucas Real Estate Group, we understand that many real estate transactions are no longer “just” real estate transactions.
Especially in Newport Beach and Costa Mesa, transactions often involve:
- LLC structuring
- Confidential ownership planning
- Trust administration
- Proposition 19 planning
- Capital gains analysis
- 1031 exchanges
- Family buyouts
- Estate transitions
- Investment repositioning
Our team regularly works with buyers, sellers, trustees, families, CPAs, exchange accommodators, attorneys, and wealth advisors to help clients think strategically about both the real estate side and the legal/tax side of the transaction.
Helping you buy, sell, hold, and navigate every legal and tax detail along the way.
Final Thoughts
Revenue Rulings 99-5 and 99-6 are some of the most powerful — and misunderstood — concepts in the 1031 exchange world.
Under the right facts, they may create opportunities for:
- Buying into an LLC
- Buying out a partner
- Acquiring partial interests in real estate
- Structuring family investment transitions
But they are highly technical.
And they absolutely should not be implemented casually.
If you own investment property in Newport Beach, Costa Mesa, Corona del Mar, Newport Coast, or surrounding Orange County communities and are considering:
- a 1031 exchange,
- an LLC restructuring,
- a family buyout,
- a trust or estate sale, or
- an investment property transition,
our team would be happy to discuss potential strategies and help coordinate with your CPA and tax advisors.
About Lucas Real Estate Group
At Lucas Real Estate Group, in partnership with Coldwell Banker Newport Beach and the Coldwell Banker Global Luxury Program, we offer a tailored, full-service approach to sellers, buyers, property owners, trustees, and investors throughout coastal Orange County.
We specialize in:
- Newport Beach
- Eastside Costa Mesa
- Corona del Mar
- Newport Coast
- Dover Shores
- Newport Heights
- Mesa Del Mar
- Bayshores
- Lido Isle
- and surrounding coastal communities
Our services include:
- Residential sales
- Luxury real estate
- Investment property analysis
- Property management
- Concierge “home away” services
- Trust and estate sales
- LLC formation and structuring
- Real estate legal support
- Proposition 19 planning
- 1031 exchange coordination
- Confidential and high-profile transactions
Guiding Your Real Estate Journey | Managing Your Real Estate Investments
Questions or Need Help?
Thinking of selling California real estate, we would love the opportunity to assist – we provide full service sales and property management in Newport Beach, Costa Mesa and surrounding areas. If you are seeking to sell or professionally manage your home in Newport Beach, Costa Mesa or the surrounding areas, call or email anytime for a free brief consultation – info@lucas-real-estate.com or 949-478-1623. Sign up for our Newsletter here.
For matters involving family transfers, trusts, private sales, or tax-driven strategies, please schedule a paid one-hour consultation (Zoom, phone, or in-person):
Book a consultation here
Author
Devin R. Lucas is a Real Estate Broker, REALTOR® and Real Estate Attorney specializing in Newport Beach, Costa Mesa, and Orange County coastal communities. Courtney Lucas, a licensed CPA, Real Estate Salesperson, and REALTOR®, provides expert financial insight alongside real estate services. Together, they lead Lucas Real Estate, operating in conjunction with Coldwell Banker, the region’s premier luxury brokerage.
Lucas Real Estate offers unmatched expertise in California real estate sales, property management, capital gains strategies, and property tax matters, including Propositions 13, 58, 193, 60, 90, and new Proposition 19.
Contact Us:
info@lucas-real-estate.com | 949.478.1623
Sources
- Internal Revenue Service — Revenue Ruling 99-6
IRS Revenue Ruling 99-6 - First American Exchange Company — Revenue Rulings 99-5 and 99-6 Overview
1031 Exchange Rules for LLCs: What Revenue Rulings 99-5 and 99-6 Mean for Investors - California Lawyers Association — Membership Interests and 1031 Exchanges
1031 Exchanges with Membership Interests—Revenue Rulings 99-5 and 99-6 - CLA Connect — Revenue Ruling Analysis
Revenue Rulings 99-5 and 99-6: Similar but Different - IRS Internal Revenue Code Section 1031
IRS Like-Kind Exchanges Under IRC Section 1031 - McCauslen v. Commissioner, 45 T.C. 588 (1966)
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