New Hampshire Does Not Recognize Single Member LLCs for 1031 Exchange Purposes

It has come to our attention that the State of New Hampshire does not recognize single member limited liability companies for 1031 exchange treatment.  They treat each single member limited liability company or LLC as a separate and distinct entity for state tax purposes.  This can significantly complicate the 1031 exchange process when an investor wants to sell real estate out of one single member LLC and acquire real estate in a new single member LLC. 

New Hampshire Issues Declaratory Ruling 7707

New Hampshire takes the position under New Hampshire Declaratory Ruling 7707 that if (1) an exchanger sells property held in a single-member limited liability company or other entity, which is disregarded for federal tax purposes (a “DRE”), and (2) acquires property in a different DRE, then the exchange fails for New Hampshire state income tax purposes.

Disregarded Entities Treated as Separate Entities

All DREs, including single-member limited liability companies, disregarded limited partnerships, and grantor trusts doing business in New Hampshire with gross income in excess of $50,000 are required to report and pay business profits tax. Because the business profits tax is assessed on an entity by entity basis, New Hampshire asserts that in order to enjoy Section 1031 deferral, the same entity that sold the relinquished property must subsequently purchase the replacement property.

Not Disregarded Entities for State of New Hampshire

So, the bottom line is that disregarded entities are not disregarded for State of New Hampshire purposes. 

Comments

[Tony Mallgren]

Is anyone aware of any other states that have laws like New Hampshire's that trigger state taxes on Federally qualifying like-kind exchanges? Is there a list of problem states somewhere?

[Staff]

There are certain states that have slight differences, but most follow the Federal Code for the most part. The other major difference is Pennsylvania, which does not recognize the 1031 exchange. Taxpayers can 1031 exchange into PA and defer their Federal and state taxes, but can only defer their Federal taxes when the sell property in PA and structure a 1031 exchange. I believe the PA state tax rate is around 3.04%.