Questions about 1031s and partnerships

[Jacob Thompson]

Hello:

To this point, I've always bought investment property as an individual. I'm about to form a partnership to buy property with someone, and I'm not sure how the 1031 rules might apply here.

1. Can I take investment gains from a property I own as an individual and do a 1031 exchange into a new partnership that would own new property?

2. After I make gains in the partnership, can I 1031 those back to personally owned property?

Thanks.

[Frank Adams]

If I'm reading your questions correctly (I'm pretty sure I am) then the answer to both is NO. Both relinquished and acquired properties must be held in the SAME NAME.

I've found it very difficult to hold properties in partnerships because no matter how congruent your goals may be in the beginning, things change.

all cash

[Peter Lai]

So if you have 1031 in mind as the exit strategy for the property you are buying right now that involves other partners, how would you structure the deal so you can take your share to do 1031 exchange when the property is sold?

[Bill Exeter]

Hi App196,

Your structure does not qualify for 1031 exchange treatment. The sale of property as an individual is considered a sale of a real property interest, but the acquisition of property through a partnership is actually a purchase of a personal property interest because you own an interest in the partnership and the partnership (not you) owns the interest in the real estate.

You could acquire the interest in real estate as an individual and hold the investment as an individual for at least 12 months in order to demonstrate your intent to hold as an individual so that you 1031 exhange will qualify and then contribute your interest into the partnership.

I would recommend that you meet with your legal and tax advisors and think about structuing a tenant-in-common structure or TIC where each investor acquires a direct interest in the real estate as a tenant-in-common and the overall property is governed by a tenant-in-common agreement.

This tenant-in-common structure gives each investor the ability to decide how to invest (ie via a 1031 exchange) and how to divest at the back end (ie cashing out or 1031 exchange out). It provides much more flexibility.

Those investors that are concerned about liability can set-up a single member limited liability company (SMLLC). The SMLLC is considered a disregarded entity for income tax purposes and is still treated as if the individual owns the interest in real estate.

[Steve Schow]

Its also possible to purchase the property under an LLC and convert it to a TIC later on a year before selling it. That way the partners can each 1031 into different properties with their share.

[Bill Exeter]

Steve is referring to a drop and swap where the LLC (partnership) is converted into a tenant-in-common structure by deeding (dropping) the real estate out of the LLC (partnership) and into the individual's names, holding for at least 12 months to be safe, and the completing a 1031 exchange (swapping).