Situation involves LLC "A" which holds "1031" asset and 100% owned by taxpayer.  In first part of transaction taxpayer sells 50% of LLC "A" to individual creating a 50/50 ownership in "A".  Initial funds are given to Qual. Inter. who holds, then transfers the funds at second closing to owner of replacement property.  However, in the days between sale and subsequent purchase, taxpayer creates new LLC "B" owned solely by him to acquire the new property.   My questions are:  (1) Does the use of stock taint transaction?  (2) Does the taxpayer taint transaction if there are other assets in "A" other than single 1031 asset?,  (2) Does this creation of new LLC "B" to purchase subsequent property taint transaction,  and (3) If transaction is tainted by creation of "B" can this problem be solved by having "A" make subsequent purchase and immediately drop down asset to "B"? Thankyou in advance.

Lordofbarbeque:

Situation involves LLC "A" which holds "1031" asset and 100% owned by taxpayer.  In first part of transaction taxpayer sells 50% of LLC "A" to individual creating a 50/50 ownership in "A".  Initial funds are given to Qual. Inter. who holds, then transfers the funds at second closing to owner of replacement property.  However, in the days between sale and subsequent purchase, taxpayer creates new LLC "B" owned solely by him to acquire the new property.  

I first wanted to clarify your transaction.  The creation of a two member LLC is generally treated, reported and accounted for as a partnership and not a corporation.  However, you can elect to have the two member LLC treated as a corporation.  I'm assuming that you are or will be treating this two member LLC as a partnership, so please advise if you are in fact treating it as a corporation for income tax purposes. 

My questions are:  (1) Does the use of stock taint transaction? 

Yes, this can be an issue here.  Again, I'm assuming that you are treating the LLC as a partnership after the sale of the 50% interest to your new partner.  This answer will be a little tricky, so let me know if it does not make sense. 

First, an LLC that is a single member LLC (owned 100% by one taxpayer) is considered to be a disregarded entity for income tax purposes.  This means that a 100% transfer of the entire LLC membership interest to a buyer would be considered a valid conveyance of real estate and would easily qualify for tax-deferred exchange treatment. 

However, if you sell 50% of the membership interest in the LLC to a new partner, the question is whether the IRS would consider your sale of a membership interest as a sale of a partnership interest or a sale of real estate.  There is no IRS guidance here, so this structure would involve some risk.  The IRS would most likely disqualify your tax deferred exchange as a sale of a partnership interest and not a sale of real estate. 

(2) Does the taxpayer taint transaction if there are other assets in "A" other than single 1031 asset?, 

The sale of a membership interest in the LLC would mean that the new investor now owns 50% of the LLC, which would include all of the assets held within the LLC.   

(2) Does this creation of new LLC "B" to purchase subsequent property taint transaction,  

No, the creation of another single member LLC would be considered a disregarded entity and treated as if you had acquired the new investment property even though the legal title is held in the new LLC.   The only issue is the sale of a 50% interest in LLC A, which creates a partnership.    

and (3) If transaction is tainted by creation of "B" can this problem be solved by having "A" make subsequent purchase and immediately drop down asset to "B"? Thankyou in advance.

Can you give us an idea of what you are trying to accomplish in terms of bringing on the other partner.  Do you want the other partner to actually own 50% of the LLC or just part of one property? 

Not really wanting partner.  In my above situation can I avoid the taxpayer tainting the transaction if, instead the taxpayer conveys or deeds 50% ownership of asset.  I guess my next question would be is it possible to perform a 1031 transfer by selling only 50% of the asset?  The taxpayer would still retain a 1/2 ownership of transfered property through LLC "A", but, be able to use proceeds to purchase subsequent property for himself.  Thankyou again.

Lordofbarbeque:

Not really wanting partner.  In my above situation can I avoid the taxpayer tainting the transaction if, instead the taxpayer conveys or deeds 50% ownership of asset.  

Yes, that would absolutely qualify.  The property would then be owned by your LLC as to an undivided 50% interest as a tenant-in-common and the next buyer would own the other 50% undivided interest as a tenant-in-common.  The property would be be managed as a tenancy-in-common and not as a partnership with the LLC as one owner and the buyer as the second owner.  I would also have  tenant-in-common agreement drafted to govern the management and ownership of the property between the two TICs.  

I guess my next question would be is it possible to perform a 1031 transfer by selling only 50% of the asset? 

Yes, see comments above.  

The taxpayer would still retain a 1/2 ownership of transfered property through LLC "A", but, be able to use proceeds to purchase subsequent property for himself.  Thankyou again.

Yes, the "taxpaying entity" that would complete the 1031 exchange would be you who held title through a single member LLC.  We can structure the 1031 exchange for you.  We are a qualified intermediary and would like to handle your 1031 exchange.