1031 partnership property

5 Replies

Is it possible to do a 1031 on a partnered property if the new property is the same split? 

Can you use some of the proceeds for the down and some for the rehab? 

1031 is new to me. I have never done one.

@Mike Reynolds , Yes it is possible to move a partnership forward into your next property using the 1031. The key is that whoever is the tax payer for the old property be the tax payer for the new property. So if the property is owned by an entity like an LLC or a limited partnership it is the tax payer for the property. It can sell, do the 1031, and buy the new property. The members of the LLC are just going along for the ride. It is the entity itself that is doing the exchange.

3 partners as tenants in common you have even more flexibility.  With tic ownership there are really three taxpayers.  Each one of you owns a property that is a% of a larger property.  When you sell that each one of you has the choice of what to do with your %.  All three of you could do one 1031 into a new property.  Or two of you could split off and do your own 1031 and the other person take cash and pay their tax.  Or each of you could split up and do your own 1031.

So for your first question it all depends on the ownership structure of the current property.

The 1031 can only be used for the purchase os actual real estate.  You can't exchange into improvements on property you already own.  So you can't complete a 1031 and then use the rest of the 1031 proceeds to improve the property.  It must be complete when you take title.  But there's a couple of ways you can work around this.

1. Negotiate improvements to be completed by the seller in exchange for a higher purchase price.  

2. Use a form of reverse exchange called an improvement exchange.  Instead of you taking title to the new property immediately your QI (the qualified intermediary who performs the 1031 for you) takes title to the new property and holds it while it is improved (maximum of 180 days).  Then once the improvements are complete you can take title to it to complete your exchange.  Pricier and more complex but improvement exchanges can be incredibly powerful tools when you've got the right value add property.  Particularly in your case if you've got the construction skills and background.

I'll PM you with some resources to learn about both.

@Dave Foster Very informative. Thanks for that. Yes, you guessed it, we will be using our own skills to improve the property. It has a mile of driveway and my partner has an excavation company. I will handle the building part. 

Hi @Mike Reynolds

You mention partners.  Is this a formal partnership, limited partnership or limited liability company with multiple members that is treated as a partnership?  If it is a partnership, it is important to remember that the partnership (entity) is the seller (taxpayer) and not the individuals and the partnership would have to sell, structure the 1031 Exchange under the partnership level (entity) and then buy the replacement property under the partnership.  

If it is not a formal partnership as discussed above and the relinquished property is owned/held as tenants-in-common and has been treated and reported as tenants-in-common for income tax purposes, then the investors/owners would be treated as individuals for tax purposes and can each decide what they want to do as individuals.  

You can use the 1031 Exchange to acquire the new replacement property with a down payment and then use some of the remaining 1031 Exchange proceeds to pay for capital improvements as part of your 1031 Exchange transaction, and contrary to what was posted above, you CAN build or make improvements on property that you already own (see IRS Private Letter Rulings below).  These get more complicated.  There are essentially three (3) ways to do this: 

  1. You can ask the seller of the new replacement property to make the capital improvements for you and then increase the purchase price of the property to include the capital improvements.  This one is the easiest solution, but is not really practical as most sellers will not cooperate with the structure.

  2. You can structure an Improvement 1031 Exchange.  This 1031 Exchange structure requires that the Qualified Intermediary set-up an Exchange Accommodation Titleholder or "EAT" that will serve as a parking entity that will be used to acquire and hold or "park" legal title to the new replacement property.  The taxpayer (partnership) then has the rest of the 180 calendar day exchange period to both pay for and complete any capital improvements that they want to include as part of the 1031 Exchange transaction.  This one is not the easiest solution, will be more complicated and costly, but is feasible and will not include any risk since we have Revenue Procedure 2000-37 to follow. 

  3. Again, contrary to what was posted above, it is possible to "1031 Exchange into" improvements made or completed on rental, investment or business use property that you already own.  We refer to this structure as an Advanced Improvement 1031 Exchange.  This structure WILL involve some degree of risk, so the taxpayer entering into an Advanced Improvement 1031 Exchange must be willing to accept a higher level of risk.  It essentially involves leasing the property that the taxpayer wishes to improve to an Exchange Accommodation Titleholder or EAT and then having the EAT make the improvements to the property within the 180 calendar day exchange period.  We have three (3) Private Letter Rulings issued by the the IRS that outlines how this transaction can be structured:

  4. There are three (3) Private Letter Rulings (“PLRs”) that address this Advanced Improvement 1031 Exchange structure/strategy, which are as follows: 


Private Letter Ruling Number 2014-08019
Private Letter Ruling Number 2003-29021
Private Letter Ruling Number 2002-51008

Originally posted by @Bill Exeter :

Hi @Mike Reynolds, 

You mention partners.  Is this a formal partnership, limited partnership or limited liability company with multiple members that is treated as a partnership?  If it is a partnership, it is important to remember that the partnership (entity) is the seller (taxpayer) and not the individuals and the partnership would have to sell, structure the 1031 Exchange under the partnership level (entity) and then buy the replacement property under the partnership.  

If it is not a formal partnership as discussed above and the relinquished property is owned/held as tenants-in-common and has been treated and reported as tenants-in-common for income tax purposes, then the investors/owners would be treated as individuals for tax purposes and can each decide what they want to do as individuals.  

You can use the 1031 Exchange to acquire the new replacement property with a down payment and then use some of the remaining 1031 Exchange proceeds to pay for capital improvements as part of your 1031 Exchange transaction, and contrary to what was posted above, you CAN build or make improvements on property that you already own (see IRS Private Letter Rulings below).  These get more complicated.  There are essentially three (3) ways to do this: 

  1. You can ask the seller of the new replacement property to make the capital improvements for you and then increase the purchase price of the property to include the capital improvements.  This one is the easiest solution, but is not really practical as most sellers will not cooperate with the structure.

  2. You can structure an Improvement 1031 Exchange.  This 1031 Exchange structure requires that the Qualified Intermediary set-up an Exchange Accommodation Titleholder or "EAT" that will serve as a parking entity that will be used to acquire and hold or "park" legal title to the new replacement property.  The taxpayer (partnership) then has the rest of the 180 calendar day exchange period to both pay for and complete any capital improvements that they want to include as part of the 1031 Exchange transaction.  This one is not the easiest solution, will be more complicated and costly, but is feasible and will not include any risk since we have Revenue Procedure 2000-37 to follow. 

  3. Again, contrary to what was posted above, it is possible to "1031 Exchange into" improvements made or completed on rental, investment or business use property that you already own.  We refer to this structure as an Advanced Improvement 1031 Exchange.  This structure WILL involve some degree of risk, so the taxpayer entering into an Advanced Improvement 1031 Exchange must be willing to accept a higher level of risk.  It essentially involves leasing the property that the taxpayer wishes to improve to an Exchange Accommodation Titleholder or EAT and then having the EAT make the improvements to the property within the 180 calendar day exchange period.  We have three (3) Private Letter Rulings issued by the the IRS that outlines how this transaction can be structured:

  4. There are three (3) Private Letter Rulings (“PLRs”) that address this Advanced Improvement 1031 Exchange structure/strategy, which are as follows: 


Private Letter Ruling Number 2014-08019
Private Letter Ruling Number 2003-29021
Private Letter Ruling Number 2002-51008

At the moment it is in both our names but we are thinking about forming an LLC to buy another property.

 

Updated about 2 months ago

Yes, it is possible to do a 1031 on a partnered property if the new property is the same split. The deciding factor is that whoever is the taxpayer for the old property, be the taxpayer for the new property. If an entity like an LLC or a limited partnership owns the property, it is the taxpayer for the property. It can sell, do a 1031 exchange, and purchase the new property. It entirely depends on the ownership structure of the current property. 1031 can only be utilized for the purchase of the actual real estate.

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