Thread: 1031 question

This is a tax question. Based on your description the property does qualify for a 1031 exchange, so long as it is being exchanged for like property. Meaning other property held for productive use or investment.

Partnerships do present a problem because many time some partners want to cash out and others want to reinvest. Any amount that is received as cash or other proceeds outside of the like kind transfer, not reinvested, is considered boot which is taxable.

One practical solution would be for the partnership to do the exchange and then dissolve. This requires careful planning. There isn't enough information here to get more specific. I can tell you that property other than investment property, cash, and mortgages on the exchanged property complicate things. It matters if or when you identify the target exchange property, it can also work as a reverse exchange in certain circumstances if you've already purchased a replacement investment property. In short it can be done, but you'll need help. I wouldn't do it on my own either because the tax consequences can be severe.

Thanks for your reply, Tom.

The unfortunate issue lies in the fact that not all owners want to perform a 1031 exchange, and some of the circumstances are less than amicable. I have been informed that it's possible that if all parties do not perform a 1031 exchange after the sale of the property, then the parties that would like to do so must get some kind of waiver from the parties that do not...does that make any sense? Unfortunately, the party not interested in a 1031 exchange is also the party with the largest axe to grind, so needing to get a waiver/permission to use my after-sale quarter for a 1031 exchange might be problematic.

Thanks again for your response Tom. I do have fairly competent representation, but I always like to get as many opinions as possible for something this large.

M

Did you talk about a Deferred Sales Trust (DST)?

Hi M,

This response might be too late, but I thought I would post it anyway just in case it helps.

Are you holding title and treating the ownership as a partnership or as tenants-in-common? Do you file a partnership tax return? The fact that there are four owners does not mean that it is an automatic partnership.

You are in great shape if you hold title as tenants-in-common. Each investor can proceed however they wish. You may have issues if it is truly a partnership.

The Deferred Sales Trust(tm) might be a solution if the property is actually held in a partnership and the 1031 exchange is not really an option due to timing.

Let me know if I can be of any further help.