1031 Exchange Answers

I own my property as a partnership, will that affect my 1031 Exchange?

For tax and liability reasons investment real estate is commonly owned by an entity other than the investor (corporations, partnerships, trusts etc.).  When doing an exchange it is important to note that these various forms of ownership have different tax treatment that may affect the exchange.  1031 law states that the owners of the relinquished property and replacement property must be the same taxpayer.

If a partnership owns property and wants to use an exchange, it must acquire the replacement property under the same partnership name.  Frequently, individual members desire to cash out when the property sells and purchase replacement property under their own name, not as a partnership. This could result in significant tax risk because the ownership of the relinquished and replacement properties is not the same.

Another option can be to dissolve the partnership prior to initiating the exchange and distribute ownership to the members as tenants in common. The individual partners can then exchange their ownership portions separately without the partnership as owner of the replacement property.  It is important that the relinquished property be held by the individual owners for a decent interval of time in order to comply with the "held-for" investment requirement of 1031 Exchanges.

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