Common Ownership Problems with 1031 Exchanges

1031 EXCHANGE HANDBOOK ...

EXCHANGES OF A MORE ADVANCED NATURE

Common Ownership Problems

Any tax paying entity can do a 1031 Exchange including C Corporations, S Corporations, partnerships and limited liability companies.  Remember the taxpayer on the old property must be the same taxpayer on the new property.

One common ownership problem is that owners often don’t know how they hold title to the property.  If two or three people own a property, they may hold title to the property as tenants-in-common, but still be deemed a partnership for federal income tax purposes.  A taxpayer may not exchange into or out of partnership interests.

Another common ownership problem arises when an investment property is owned by a partnership, an LLC or corporation.  The decision has been made to sell the investment property, and some of the partners wish to do an exchange, while others wish to take the cash.  In this situation, a well intentioned attorney or CPA may advise dissolving the entity so that each owner can choose his own course of action.  This may not be sufficient, however.  If the entity is dissolved before the exchange, the IRS could argue that the property was not held by the former partners, members or shareholders for investment, since it was held in their name for only a few days from the time it was distributed to them. 

Ownership issues can be a real minefield for an exchange.  Please call Olympic Exchange Accommodators, LLC before you enter the exchange process for individualized consultation.  If you are contemplating a partnership split-up, our lawyers can assist you.