Vesting Considerations for the 1031 Exchange Same Taxpayer Rule

December 3, 2025

When real estate investors think about a 1031 exchange, they typically focus on the big, obvious requirements: the tight 45-day identiﬁcation window, the 180-day closing deadline, the need for “like-kind” replacement property or the role of the Qualiﬁed Intermediary (QI). But there’s another rule that is just as fundamental and surprisingly easy to overlook: vesting.

Vesting refers to how a property’s title is held, speciﬁcally the name or entity listed on the deed. While that might seem like a technical detail, vesting has a large impact on the 1031 exchange same taxpayer rule and plays a critical role in whether the IRS will allow tax-deferred treatment. A simple title change done at the wrong time can unintentionally trigger capital gains tax, even when every other exchange requirement is met.

Whether you invest in commercial property, residential rentals or land, understanding how vesting interacts with the same taxpayer rule is essential to a smooth and compliant exchange. Below, we break down what you need to know, common pitfalls and what you can do to keep your exchange on track.

What the Same Taxpayer Rule Really Means

At its core, the same taxpayer rule requires that the taxpayer who sells the relinquished property must also acquire the replacement property. In other words, the tax identification number issued by the IRS used for both transactions must match. The rule focuses on the underlying tax identification number, and not necessarily the exact name on legal title. Therefore, a disregarded entity can be used without violating the rule. A disregarded entity is separate from its owner for legal reasons but not for federal income tax purposes. Examples of common disregarded entities are single-member limited liability companies and revocable trusts. For example, if Mark Jones sells a property, he could purchase a replacement property in an LLC if Mark is the sole member and it is disregarded for tax purposes – meaning that the income and expenses for the LLC are reported on Mark’s personal tax return.

This continuity of ownership is a foundational requirement of a 1031 exchange. The IRS views a 1031 exchange as a continuation of an existing investment, not the start of a new one, so the taxpayer must remain the same throughout the transaction.

A change in the taxpayer’s identity breaks the chain of ownership, which usually results in immediate tax recognition of the gain and eliminates the beneﬁts of the 1031 exchange.

Five Common Vesting Scenarios That Break the Same Taxpayer Rule

While vesting may seem like a formality, the IRS uses it as a major indicator of taxpayer identity.

If the name or entity on the deed changes between sale and purchase, the IRS often considers this a change in taxpayer — even if, economically, you view the owner as the same.

This makes vesting a high-risk area for mistakes. Below are some of the scenarios investors encounter, often without realizing their implications.

1. Adding or Removing Individuals

Many people make the mistake of selling a property in an individual’s name with plans to acquire the replacement property jointly with a spouse, sibling or child.

Example:

You sell a rental home titled solely in your name. You then purchase a multifamily building with your spouse listed on the deed as a co-owner.

Result:

In most non-community property states, your spouse is now a new taxpayer and the same taxpayer rule is violated. This may not be the case in community property states, so it is important to consult your tax advisor.

The opposite may also be true in non-community property states: removing a taxpayer who was listed on the relinquished property deed can cause a problem when they do not appear on the replacement property deed.

2. Changing from an Individual to an LLC

Investors often want to acquire a replacement property in an LLC for liability reasons. While an LLC oﬀers clear beneﬁts, this can break the same taxpayer rule unless it is a single-member LLC that is disregarded for tax purposes.

If the LLC has multiple members or ﬁles its own tax return, it becomes a diﬀerent taxpayer.

3. Using Partnerships or Multi-Member LLCs

Partnerships are distinct taxpayers for IRS purposes. If a partnership sells the relinquished property, the partnership must acquire the replacement property. Individual partners cannot complete the exchange with their share of the proceeds unless they restructure early and carefully.

This is where the common “drop and swap” strategy comes in, but that must be done well before entering an exchange and typically with guidance from both legal and tax professionals.

4. Trust Ownership

Not all trusts are treated the same for tax purposes. Revocable living trusts and grantor trusts are disregarded entities, meaning the IRS looks through the trust to the individual taxpayer who controls it. These trusts can often participate in a 1031 exchange without issue.

Irrevocable non-grantor trusts, however, may be treated as separate taxpayers. If the relinquished property was owned by an individual but the replacement property is titled to an irrevocable non-grantor trust, the exchange may not be allowed.

5. Death in the Midst of an Exchange

If a taxpayer passes away after the relinquished property is sold but before the exchange is completed, the taxpayer’s estate can often complete the exchange under strict rules. Because the estate is considered the taxpayer’s legal successor, it maintains continuity.

However, heirs who receive the property after the exchange cannot do their own exchange of that same property until they have established their own taxpayer ownership.

When Vesting Can Change Without Violating the Rule

Not all vesting changes break the same taxpayer rule. Some exceptions exist, but they rely on tax treatment rather than the name itself.

Acceptable exceptions often include:

Single-member LLCs (as long as they are legally and tax-wise “disregarded entities”)
Grantor trusts or revocable living trusts
Land trusts in certain states
An estate becoming the successor taxpayer due to the owner’s death

In all these cases, although the name on the deed may look diﬀerent, the IRS still sees the same underlying taxpayer, maintaining the continuity required for a valid exchange.

There’s one important word of caution about these exceptions: they must apply for both the relinquished and replacement property. For example, a single-member LLC cannot step into the exchange midway if the individual owned the relinquished property personally. The structure must be continuous from start to ﬁnish.

The Best Ways to Protect Your Exchange

Match Vesting Before You Begin the Exchange

The most reliable way to protect your exchange is also the simplest: keep vesting the same from the sale of the relinquished property to the purchase of the replacement property.

Before you list your property or line up a buyer, examine how the title is held and identify how you intend to take the title on the replacement property.

Keep in mind that title vesting is governed by state law and does not override federal tax classification rules.

Use Disregarded Entities Thoughtfully

If liability protection or estate planning is the goal, consider using a structure that is treated as the same taxpayer, such as a single-member LLC or revocable trust. Conﬁrm with your CPA that the entity is truly treated as disregarded. Even small diﬀerences can lead to unexpected problems.

Coordinate With Your QI

Your QI should always know who the taxpayer is and how vesting will look on both properties. They help document the exchange in a way that aligns with IRS guidelines, but they can only do so if they have accurate information.

Consult Your CPA and Attorney Before Making Ownership Changes

Financing, asset protection and estate planning needs should be addressed before the exchange begins. Once the exchange is underway, changing title structure becomes signiﬁcantly more complicated.

Be Cautious About Re-Deeding Immediately After Closing

Some investors close on the replacement property in their individual name to satisfy the same taxpayer rule and then immediately transfer the property into an LLC. Some tax advisors approve this but others do not, believing it may attract unwanted IRS scrutiny.

Generally, the safest approach is to structure vesting properly from day one or wait a reasonable period after the exchange is complete before transferring title. Keep in mind that the risk is intent-based rather than timing-based so even a reasonable period of time to hold a parcel may not satisfy the intent to hold a parcel for investment or business purpose.

Practical Examples

Here are a few simpliﬁed illustrations that show how vesting scenarios might play out:

Example 1: Individual to Single-Member LLC (Allowed)

Relinquished property: Jane Doe (individual)
Replacement property: Jane Doe LLC (single-member, disregarded entity) Outcome: Allowed. The IRS still views Jane personally as the owner.

Example 2: Individual to Individual + Spouse (Disallowed)

Relinquished property: John Smith
Replacement property: John Smith and Mary Smith Outcome: Disallowed. Mary is a new taxpayer.

Example 3: Partnership to Individual Partner (Disallowed)

Relinquished property: ABC Partnership
Replacement property: Partner A

Outcome: Disallowed unless a restructuring was done long before the exchange.

Example 4: Owner Dies Mid-Exchange (Potentially Allowed)

Taxpayer passes away after selling relinquished property.
Estate acquires replacement property.

Outcome: Often allowed because the estate is the legal successor.

Expert Support for the Most Complex 1031 Exchange Scenarios

Navigating vesting, entity structures and the same taxpayer rule is one of the most technically sensitive aspects of a 1031 exchange. The National 1031 team has decades of experience guiding investors through exchanges that involve LLCs, trusts, partnerships, estate planning structures and other complex ownership situations.

Whether you’re planning a straightforward exchange or considering changes to ownership structure, we provide the clarity and strategy you need to move conﬁdently through every phase of the process.

1031 exchanges are highly fact-specific. Taxpayer identity is determined under federal tax law, not title vesting alone. Investors should consult their CPA and legal advisor before making ownership changes.

National 1031 is your expert in guiding you through a 1031 exchange and serving as your Qualified Intermediary. Contact us today with your 1031 exchange questions using the form below.