What to consider when structuring 1031 partnership exchanges
Partnerships present challenges for tax planning, particularly regarding the deferral of capital gains through a 1031 Tax Deferred Exchange. Partnership interests are excluded from 1031 Exchange treatment under IRS Section 1031 because they are considered personal property, even if the partnership holds real estate assets.
To navigate this, partners can strategize by restructuring their ownership to potentially qualify for a future 1031 Exchange involving the partnership’s real estate assets. This may involve:
1. Dissolving the partnership under Section 708 of the Internal Revenue Code and paying taxes.
2. Individual partners selling their interests or the partnership selling real property, followed by distributing cash to partners.
3. Completing a 1031 Exchange at the partnership level, then refinancing and distributing cash to non-participating partners.
4. Reorganizing under co-tenancy ownership to hold replacement property for a sufficient time, qualifying for 1031 Exchange (“Swap and Drop”).
5. Opting out of Subchapter K by electing under Section 761(a) for certain investment partnerships.
These strategies require careful planning and cooperation among partners to address complex tax implications effectively. For further variations on the strategies described above, contact a ShindelRock tax professional today to determine what options might be suitable.