Continuation of Blog Mini-Series on 1031 Exchange Problems When Property Owned in a Partnership

This is a continuation of the brief mini-series that I launched last week discussing the various challenges that taxpayers encounter when trying to sell real property that is owned by a general partnership or limited partnership.  I will link to each blog post in the mini-series as I go so that you can read them in order.

The first blog post in the mini-series discusses the various complex tax issues that crop up when an investor/partner is selling real property that is owned and held in a general partnership or limited partnership entity.  Partnership ownership can significantly complicate any 1031 exchange strategy when the investors/partners want to go his or her separate ways.

1031 Exchange Solutions with Complex Partnership Issues

Various tax strategies and structures exist that can resolve the partnership problems discussed via my last blog post in this mini-series. The preferred tax strategies or structures, which contain virtually little risk to the investor/partner, generally need at least 24 months in order to plan and roll out a safe and successful 1031 exchange transaction.   

The other tax strategies or solutions will have various levels and degrees of risk involved, which can be explained by a 1031 exchange Qualified Intermediary that has experience and expertise with these partnership problems.

Tax Strategies and Structures

The tax strategies and structures include, but are not limited to, the following:

• Partnership stays intact and partners stay together for 1031 exchange
• Drop and Swap (the 1031 exchange is completed at the investor's level)
• Swap and Drop (the 1031 exchange is completed at the partnership's level)
• Form and use a subsidiary single member limited liability companies (SMLLCs)
• Draft an installment sale note to buy out one or more of the partners
• Special allocation of boot to certain partner(s) under Section 704(b) of the Internal Revenue Code

I will discuss these tax strategies and structures in much greater detail in my continuing blog mini-series on partnership complications when a 1031 exchange is involved, so stay tuned for more information.