How to minimize taxes when dissolving partnership

[Clark Harbaugh]

We are starting the process of dissolving our investment business (LLC) that has two partners. We know we have to sell 1 property, but the rest will probably be distributed equally. My question is when we sell the property, is there a way for each partner to individually defer the capital gains tax? Normally we'd use a 1031 exchange, but since the cash of that property is going to be split, I wasn't sure what our options are.

[Ben Trageser]

Quote from @Daniel Osman:

Hi Clark, 

Before selling the property, the LLC can distribute the property to the partners as tenants in common. This involves converting the partners' interests in the LLC into direct ownership of the property. Once the property is owned directly by the partners, each partner can individually decide to engage in a 1031 exchange with their share of the property. This method allows each partner to defer capital gains tax on their portion of the property.

It's important to perform the "drop" (distribution of property to partners) well in advance of the "swap" (sale or exchange) to comply with the "held for investment" rule. The IRS has challenged simultaneous "drop and swaps," so allowing some time between these steps is advisable.

You hit this right on the head with your answer with TIC.

You could also potentially do a Exchange Post Distribution (Swap and Drop). For this strategy you would distribute the property to partners based on their ownership share, dissolve the LLC and then partners collectively sell the property. Each partner could then individually complete a 1031 EXCH by assigning their interest to a QI. As this is a little tricky, I would recommend speaking with a 1031 QI first.