LLC Partnership - 1031 Exchange - "Each his own way"

[Matthew Seguin]

Hey all,

I hope to get a better picture of the process, if possible, on the following 1031 exchange scenario:

Three years ago, two partners and I formed an LLC to invest as an LP investor in an MF deal. Currently, the sponsor is planning to sell the property in the near future, and the two other partners would like to cash out - therefore, pay taxes on capital gains. I would prefer doing a 1031 exchange with my invested amount and gains but I realized that it has many complications.

From what I understand, the easiest way would be if all of the partners decide to do a 1031 exchange and do it under the entity level - unfortunately, that's not the case. 

Could someone share if it is possible to do a 1031 exchange on my own on my proportionate amount, and if so, how? 

Thanks!

[Steve Wolterman]

This is a common but often complicated issue. The classic maneuver is to perform a "drop and swap" where you essentially convert the three members from a partnership to tenants in common by forming subsidiary LLCs under the partnership LLC and dropping (deeding) the three members' respective interest in the property to the respective subs owned by the respective members. The concern is that IRS has essentially warned taxpayers not to do the drop and swap right before the sale. For this reason, we have been utilizing 708(b)(2)(B) assets over partnership divisions for several years with great success. Essentially, the partnership LLC is divided into smaller partnerships, each resulting divided partnership primarily owned by one of the three members. Happy to discuss more on the phone. Thanks.