possible to do a 1031 exchange from a joint venture?

Question

my partner and I have a small portfolio together as a joint venture. one of us is looking to exchange the sale proceeds into a 1031 the other is looking to just cash out. is this possible?

Dave Foster · Answer

@Andy Mirza, It would appear that you probably have an undivided 51% interest as a tenant in common.  Your "joint venture" is really a tenant in common arrangement.  Which makes it easier and harder.

Easier because in a sale you can take your 51% and do your own thing - 1031 if you want.  Your partner probably doesn't need to do a 1031 on their 49%.  But because you are tenants in common that is no problem.

Harder because your interests are probably undivided which means that you own 51% of the total and not a certain actual units.  In order to just sell yours you would need to go through an equitable division and probably craft corrective quit claim deeds showing your 51% interest as a specific amount of units.   Thats going to take some accountant work and some negotiation with your partner.

Andy Mirza · Answer

@Dave Foster That's good news for me, thanks! As long as there's a path to doing it, we're ok if it's complicated. My partner and I are on very good terms and could come to an agreement.

Andy Mirza · Answer

@David M. Deeding a property is absolutely transferring the property from one person or entity to another. As you point out, there are numerous transfers that are not taxable events.

This would be a transfer for purposes of dissolving a partnership. The purpose of the transfer is to allow me to do a legal 1031 exchange, following all of the rules.

My belief is that it does not qualify as a taxable event but I'll make sure my CPA blesses this before I do anything!

Andy Mirza · Answer

I've learned that an essential thing for a 1031 exchange is that the vesting needs to be the same for the entity that you use when selling your down leg and when buying your up leg.

In my situation, my partner and I have to figure out how to divide up our assets. Once that's done, our LLC deeds certain condos to my new holding LLC. That new holding LLC buys the up leg property.

Based on some research, it appears that we can easily do this by drafting a resolution for our LLC outlining our plan. Anyone have experience dividing up assets in an LLC or doing a dissolution that can comment?

The other thing that needs to be cleared up are the tax consequences which a competent CPA or tax attorney should be able to address.

Am I on the right track here? Anything I'm missing?

Bill Exeter · Answer

Hi @Rubin Thomas,

Joint Ventures are generally treated as partnerships for income tax reporting purposes.  Partnerships have all sorts of issues when the partners are selling real property but want to go separate directions.  There are a lot of moving parts here, so it is best to have a conversation with your legal and tax advisors along with your Qualified Intermediary.

Robert Williams · Answer

@Rubin Thomas, My initial thought is that you cannot do a 515.5. LOL.

I would say do a buyout, then do your 1031.

Here is an excerpt from an article I found http://www.exeter1031.com/arti...

"...1031 Exchange Structural Solutions

The partners may either sell their individual interests in the partnership, or the partnership can sell the real property and distribute the cash to the underlying partners so that each individual partner can go their separate way.  There is no 1031 Exchange completed here.  Neither solution is particularly desirable, as both have undesirable income tax consequences.

The sale of partnership interests are specifically excluded from tax-deferred exchange treatment under the rationale that a partnership interest is a personal property interest and not a real property interest, so more complicated structural solutions are required when partners desire to go their separate ways and some or all of the partners wish to structure and complete a 1031 Exchange."...

David M. · Answer

@Andy Mirza

Once you deed the property to your new holding LLC won’t that count as a property transfer?  Deeding a property is basically a property transfer (of course unless it’s administrative such as adding / removing spouse’s name).

Andy Mirza · Answer

I'm doing research because I'm trying to do the same thing. I'm planning to contact a knowledgeable attorney once I have a little bit of knowledge so that we can have an intelligent conversation.

My partner and I own 19 rental condos in an LLC. My partner is technically my partner's pension plan (49%) and I, personally, own the other 51%.

I've decided that I want to 1031 my part into commercial property, most likely self storage. My partner might come along with me or he might decide to keep his half and refinance them. (We have a loan coming due in the next 8 months or so, prompted this whole discussion.) We'll need to figure that out very soon.

Either way, I want to split my portion so that I have 100% control going forward.

Is the best way to do this, to separate the 19 condos into his and mine? That way, I can sell mine and he can do what he wants with his?

Would our original LLC have to Quitclaim properties to me personally or another entity I create for title holding purposes before selling the down leg properties?

I appreciate any help on this!

possible to do a 1031 exchange from a joint venture?

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