Partnership Issues in a 1031 Exchange: Part I – Advanced Planning Options

(This is a two-part series with relevant information for real estate investors involved in partnerships. See next month’s installment discussing options for investors when advance planning is not an option.)

An important issue when addressing partnership exchanges is the investment objective of the various partners. When all of the partners want to exchange, it’s easy to structure an exchange under Section 1031. It is , however, more difficult when partners have different investment objectives.

Under IRC §1031(a)(2)(D) the IRS expressly prohibits the exchange of partnership interests in a 1031 exchange transaction. §1031 precludes such exchanges regardless of whether the interests exchanged are general or limited partnership interests.

A commonly asked question we receive is “how can individuals that hold title in a partnership go their separate ways?” Some may want to cash out; others may want to continue down the 1031 Exchange path. Most partnership issues can be resolved with advanced planning and communication.

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