There are some tax professionals who think you can do a 1031 exchange immediately after partnership distribution. These professionals rely on a specific case (Magneson v. Commissioner). In this case, a taxpayer did an exchange and then immediately contributed his replacement property to a partnership. The IRS said he wasn’t allowed to do that, but ultimately Magneson won. However, this case was decided based upon facts and law that no longer exist. This was pre-1984, prior to partnership interests being explicitly excluded from 1031 treatment. So this case is not a great basis for building your tax planning.
Consult with Your Tax Attorney
The best advice is to consult with your tax attorney and reconfigure the ownership of your partnership assets early – well before you’ve listed the property for sale. That will be the most defensible position for your 1031 exchange. Right now the FTB (Franchise Tax Board) in California is going after these types of drop and swap 1031 exchanges. But they’re much more accepting of a pre-planned partnership division, where you spin off subsidiaries and drop the real estate into entities that are considered continuations of their predecessors. This is sometimes referred to as a 708 spin-off.
If you drop down out of your partnership to a tenancy-in-common and you don’t notify the bank, you’re technically in default of your sale clause. This isn’t a problem if you don’t have a bank lender. But if you own encumbered property you should probably ask the bank first. You should also probably change your insurance as well because the insureds have changed. Your accountant should also be immediately notified.
1031 Exchange Professionals in Minneapolis, MN
CPEC1031, LLC offers 1031 exchange intermediary services in Minnesota and across the United States. Our team of like-kind exchange qualified intermediaries has over two decades of experience working on like-kind exchanges of qualifying real property. Let us help you with your next 1031 exchange and defer your capital gains taxes when selling real estate. You can find us at our primary offices, which are located in downtown Minneapolis. We also provide 1031 exchange services to clients throughout the United States.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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